Euroland first-quarter GDP details released today support the view here that the Kitchin inventory cycle downswing is further advanced than in other regions – a positive for relative economic prospects.
Firms continued to increase stock levels in the first quarter but the rise, expressed as percentage of GDP, was the smallest since the fourth quarter of 2017. Stockbuilding, by contrast, increased further in the US, Japan and UK and is near the top of the historical range – see first chart.
GDP growth depends on the change in stockbuilding. The annual change has turned significantly negative, consistent with the cycle moving towards a low, while a survey-based leading indicator may be bottoming – second chart.
Euroland money trends also suggest that economic news will hold up better than elsewhere – see previous post.
An improvement in relative news could contribute to a rally in the euro, which has yet to reflect a strengthening of the basic balance of payments position* since mid-2018 – third chart.
As shown by the fourth chart, this strengthening has been driven by a cessation of net outflows on the direct and portfolio investment accounts, in turn reflecting the ending of QE – much of the liquidity previously being created by the ECB was “exported”.
Euroland / US interest rate differentials remain heavily negative but have narrowed, a trend that may continue as US economic weakness causes markets to expect more significant Fed policy easing – fifth chart. The ECB, meanwhile, may be reluctant to consider rate cuts or restarting QE before President Draghi’s successor takes the helm at end-October.
*Current account plus net direct and portfolio investment flows.