3 Numbers: Stronger outlook for US retail sales
- Euro area’s Q2 growth slowed, yearly growth intact but modest
- US July retail sales show good times continuing after strong Q2
- US consumers still very optimistic, but large gains improbable
By Juhani Huopainen
According to the consensus forecast, the initial estimate of Q2 growth is unchanged at 0.3%.
The unusually high Q1 growth rate of 1.3% means the Q2 figure is not as bad as the headline figure suggests. The consensus estimate was only slightly higher, 0.4%, so the disappointment was contained.
The year-on-year growth rate in the second quarter was 1.6%, in line with 2015-2016.
Looking at the longer chart, the euro area’s growth rate seems to have averaged at below 2%. Only around the dot-com boom and before the financial crisis did the growth rate rise above average.
In 2011 the growth rate was larger because the economy was recovering from the euro crisis slump. Outside those areas, the average growth rate has been about 2%.
The European key decision-makers will probably view the current growth rate as a little below target – instead of 1.6%, they would like to see 1.8-2%.
As the limits of monetary policy have been reached, the continuing strategy is to allow slightly easier fiscal policy. However, it will be difficult to get back to the trend growth rates of the past because of high structural unemployment and a feeble global economy.
Thus, the European Central Bank’s attitude is more likely to be that this is probably as good as it gets, and that further measures may introduce new uncertainties from moral hazard to bond shortages.
The ECB will probably be forced to extend its bond purchase program beyond the March 2017 date. A small rate cut or an increase of asset purchase amounts is also expected at some point.
So the ECB is almost out of ammo. It probably has one more bullet left – buying uncovered bank bonds or more unconventional assets.
But the ECB is unlikely to fire that last bullet to try to lift growth, keeping it in the locker in case of an existential threat.
US July Retail Sales (1230 GMT). Retail sales growth is expected to slow down a bit from June’s 0.6% gain to an estimated 0.5%. While some sort of slowdown after a great second quarter is to be expected, the third quarter is still off to a great start, if the expected growth rate is reached.
The retail sales control group, which excludes food, auto dealers, building materials and gas stations, and is seen to be represent core spending, is expected to have increased by 0.3% following a 0.5% growth in June.
With interest rates low, employment high and wages rising, consumer sentiment remains high and retail sales should do well in coming months.
It should be noted that the Federal Reserve’s latest policy statement said “near-term risks have diminished”. A possible rate rise, political risks from the presidential election and rising oil prices could begin hurting sentiment down the road. Personal income has also not risen quickly enough to make large retail sales gains sustainable.
In fact, looking at the chart, some of these fears can be pointed out visually. The monthly and yearly growth rates are close to the highs seen in the past five years.
US August U. Michigan Consumer Sentiment (1400 GMT). Consumer sentiment is expected to improve in August to 92 after falling to a three-month low in June. Sentiment remains at optimistic levels usually seen during periods of economic growth.
The index has been moving sideways since the beginning of 2015. Reaching highs last seen in the late 1990s would require higher wage growth, so large gains from the current levels seem improbable.
Consumer sentiment seems to have been following inverted crude oil prices with a slight lag: