Global Rundown

It is of course too soon to say that concerns over slowing are already passé but there was at least as much good news on the global economy during the week as bad news. This strength was perhaps manifested in the global stock markets where notable weekly gains ranged from 3.3 percent for the CAC in Europe to 2.0 percent for the Nikkei and 2.8 percent for the Hang Seng. Currencies were mostly stable in the week though the pound posted strong gains of more than 2 percent, benefiting from an expected push back for the March 29 Brexit deadline following a week of high political theatrics in London.

Yet however much Brexit worries have been holding down European business investment, the latest data on Eurozone industrial production point to a solid opening for the first quarter. And though trade data out of Germany, at least at the headline level, aren't pointing to much strength, the details give reason for optimism. Better strength is coming out of the UK where industrial production, and also GDP, may be on the mend while UK exports may suddenly be showing traction. Slowing, nevertheless, is still the theme coming out of Asia, whether the latest data out of Japan or India or the latest on Australia's housing sector. Still, there is some good news hidden in the Chinese industrial production report while a pop higher for manufacturing is the news out of Canada.

First we start, however, with another note of caution from a central bank, this time from Japan. Yet the question to ask perhaps is whether the movement in the global economy, at least some of which is positive, will limit the downshift underway in global monetary policy.

The Bank of Japan's Monetary Policy Board left monetary policy settings unchanged at their March meeting. As it has been since early 2016, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent with the target level for the long-term 10-year yield remaining at around zero percent. The BoJ's policy framework also involves officials adjusting the pace of their purchases of Japanese government bonds in order to keep the 10-year yield close to its target level of zero percent. For now, officials continue to believe that purchasing these bonds at an annual rate of Y80 trillion is consistent with meeting this target. MPB members voted 7-2 in favor of these decisions.

The fundamental assessment is little changed, that the Japanese economy will continue to expand moderately supported by accommodative monetary and fiscal policy. Yet officials are now more cautious about the external outlook and expect some near-term weakness in exports though still forecasting them to remain on a "moderate increasing trend". Although price pressures have remained subdued, officials continue to forecast inflation to increase "gradually" toward their 2.0 percent target, reflecting their view that the output gap will remain positive (strong demand for goods and services) and that inflation expectations are likely to strengthen. Reflecting this outlook and their objective to push and keep inflation above target, officials reiterated their commitment to keeping policy rates at "current extremely low levels" for "an extended period of time".

Speaking at the post-meeting media conference, BoJ Governor Haruhiko Kuroda argued that domestic demand remains solid and expressed confidence that conditions would improve in China and other major economies. He also dismissed recent suggestions that the BoJ should raise policy rates to assist the profitability of domestic banks even if this were to make it more difficult to hit the inflation target. Instead, he insisted that the current target remains appropriate and that policy will continue to be set with that target as the objective.

Indicator scoreboard

Europe

Eurozone

The week's good news on the global economy begins with industrial production in the Eurozone which improved in January, moving from minus 4.2 percent year-on-year to minus 1.1 percent. On a monthly basis, production rose 1.4 percent benefiting from energy and non-durables with consumer durables, at a 1.1 percent gain, especially strong. On the downside, capital goods fell 0.9 percent following December's 1.1 percent decline. Though Eurozone production has fallen in five of the last eight months, its level in January was 0.4 percent above its mean reading in the fourth quarter when the sector fell into recession. Regionally, there were solid monthly increases in France of 1.3 percent, Italy at 1.7 percent, and Spain at 3.6 percent. Yet Germany disappointed with sizable monthly contraction.

Germany

Germany's merchandise surplus did slip to a seasonally adjusted €18.5 billion in January vs €19.9 billion in December for its smallest outturn since last October – but exports aren't to blame. Exports edged higher to €112.4 billion and a new record but imports jumped, rising 1.5 percent to €93.9 billion. Imports have now risen in four of the last five months. The slowdown in world business activity has seen the German trade surplus shrink by almost a fifth from the highs recorded in late 2017 and has contributed to the deceleration in German GDP. That said, total net foreign trade had a neutral impact on economic growth last quarter and the January data provide at least some hope for no, or little, drag this quarter.

Pressures on German consumer prices had been easing but February saw a small uptick, to a final year-on-year rate of 1.5 percent vs January's 1.4 percent. This is the first increase in three months and hints at demand-side improvement. On a monthly basis, February's increase was 0.4 percent and reflected a sharp 1.3 percent increase for food and non-alcoholic beverages as well as a 0.4 percent rise in household energy costs. A number of other subsectors posted small rises and as a result, excluding food and energy, inflation crept a tick higher to 1.4 percent. There may be little to suggest that German inflation is about to take off but rising wages are certainly providing some support as are competitive pressures among producers who may be wary about losing market share.

Certainly not all the news out of Germany is improving. Industrial production failed to rebound as expected in January, posting a year-on-year decline of 3.6 percent which was deeper than December's drop of 3.3 percent and, next only to November's 4.5 percent contraction, is the weakest showing of the economic expansion. Month-to-month, January's production fell a sizable 0.9 percent and reflected sharp declines for intermediates and especially capital goods. In partial offsets, consumer goods climbed strongly as did energy. Industrial production has now fallen in four of the last five months and in six of the last eight. With orders still trending south, February and March will struggle to secure the cumulative rise needed this quarter for growth to return to positive territory.

UK

However much Brexit may be clouding the outlook, the week's economic news out of the UK gives cause for hope. GDP bounced back sharply in January, posting a 0.5 percent monthly increase in total output that more than reversed December's 0.4 percent decline. Annual growth climbed from 1.0 percent to 1.4 percent, its first increase since October. The monthly advance reflected a much better period for both services and goods production. The former was up 0.3 percent after a 0.2 percent drop and the latter gained 0.6 percent following a 0.5 percent decrease. Within goods producing industries, manufacturing output unwound December's 0.7 percent fall with a 0.8 percent jump, its sharpest gain since June 2018. Elsewhere, construction was up 2.8 percent to fully offset the previous period's slump while agriculture, however, contracted 1.3 percent. Though monthly data can be volatile, January proved surprisingly robust and at least suggests that the trend rate of growth has not slowed any further.

Industrial production in the UK jumped 0.6 percent to reverse December's 0.5 percent decline, though annual growth was left unchanged at minus 0.9 percent. The manufacturing sector outperformed with a 0.8 percent monthly bounce that similarly more than unwound the previous period's 0.7 percent fall. This was strong enough to boost yearly growth from minus 2.1 percent to minus 1.1 percent, a 3-month best as tracked in the accompanying graph. The monthly jump reflected rises in eight of the 13 subsectors led by pharmaceutical products which surged 5.7 percent and alone contributed 0.3 percentage points to the monthly change in total production. Computer, electronic and optical products (1.8 percent), rubber and plastics (1.5 percent) and food, drink and tobacco (1.3 percent) all made decent ground too. However, transport equipment (minus 1.4 percent) struggled. The January report puts the 3-month change in overall industrial production at minus 0.8 percent, up from minus 1.1 percent in the fourth quarter and in manufacturing output, at minus 0.7 percent after minus 0.9 percent. Despite the January bounce, underlying trends remain soft.

Though the UK's deficit on goods trade was £13.08 billion in January and deeper than December's £12.67 billion, the headline masks a decent performance by exports which rose 4.1 percent on the month for their first increase since October. Yet this was more than offset by a 3.8 percent jump in imports. The shortfall with the rest of the EU weighed in at £8.11 billion, vs £8.32 billion in December, and with the rest of the world at £4.97 billion, up from £4.37 billion. Despite January's export improvement, the external trade position of the UK remains disappointing and any boost from the pound's 2016 post-Brexit referendum slide seems to have run its course. This may not matter in the short term but could in the longer run especially if Brexit does not turn out well.

Asia Pacific

China

However much there may or may not be signs of emerging strength out of Europe, the week's data out of Asia look soft. Chinese industrial production did rise 5.3 percent on the year for January and February combined, but this is down from 5.7 percent in December and below expectations (note that separate year-on-year data for January and February are not published because of the impact of differences in the timing of lunar new year holidays). Industrial production rose 0.43 percent on the month in the latest period after increasing 0.49 percent in December. The slowing in headline industrial production growth in the first two months of the year relative to December was mainly driven by the utilities sector, where output growth slowed from 9.6 percent to 6.8 percent, and also the mining sector where growth weakened from 3.6 percent to just 0.3 percent. Growth was relatively steady in the manufacturing sector, picking up slightly from 5.5 percent to 5.6 percent, with weaker growth in the production of autos and communication equipment offset by stronger growth in chemicals and steel output.

Japan

Clearly soft were Japan's private sector machinery orders which fell 5.4 percent on the month in January excluding volatile items after falling 0.3 percent in December. On the year, machinery orders fell 2.9 percent, well down from an increase of 0.9 percent in December. Non-manufacturing orders were especially weak, down 8.0 percent on the month after increasing 5.6 percent in December. Manufacturing orders also fell but to a lesser extent than previously, down 1.9 percent on the month after falling 4.4 percent in December. Private sector machinery orders (excluding volatile items) are now estimated to have fallen 3.2 percent in the three months to December compared with the previous estimate for a fall of 4.2 percent. Japanese officials expect orders to fall 0.9 percent on the quarter in the three months to March.

India

Also not pointing to much strength is the latest data out of India. The nation's industrial production index managed only a 1.7 percent increase on the year in January, slowing from 2.4 percent in December. Headline industrial production was pulled lower by manufacturing output, which accounts for almost 78 percent of the total index. Growth here slipped to 1.3 percent on the year in January after increasing 2.7 percent in December. At the most recent policy meeting held early last month, officials at the Reserve Bank of India downgraded their near-term growth forecasts for the first half of the fiscal year starting April from 7.5 percent to a range of 7.2 percent to 7.4 percent.

India's inflation news is also on the soft side. Though the consumer price index did increase by a year-on-year 2.57 percent in February, up from 2.05 percent in January, it is close to the bottom of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent and 4.0 percent mid-point. The increase was largely the result of a smaller decline in food and beverage prices (around 54 percent of the index) which fell 0.07 percent on the year in February after dropping 1.29 percent in January. Fuel and light charges recorded a weaker year-on-year increase of 1.24 percent, down from 2.20 percent in January, while the year-on-year increase in housing costs eased from 5.20 percent to 5.10 percent. Inflation in urban areas rose from 2.91 percent in January to 3.43 percent in February while inflation in rural areas picked up from 1.22 percent to 1.81 percent. Despite February's pick up, further rate cuts may well be be considered if headline inflation remains below the mid-point of the RBI's range.

Australia

Another sign of weakness of global note is coming out of Australia's housing sector. The number of dwelling commitments for owner occupied housing fell 2.6 percent in January after dropping 6.0 percent in December. Yet January's decline is less severe and reflects a similar change in loans for the purchase of established dwellings, the largest category, down 0.6 percent on the month, after falling 9.7 percent previously. But other categories also recorded further declines, with loans for the construction of dwellings falling 0.2 percent on the month and loans for the purchase of new dwellings down sharply by 9.5 percent. On the year, dwelling commitments fell 13.6 percent after dropping 11.4 percent in December. The value of home loans also fell further in January, with a drop of 1.3 percent in owner occupied housing commitments and a fall of 4.1 percent in the value of investment housing commitments.

Americas

Canada

But there is good news coming out of the Americas, perhaps not the U.S. following the prior week's employment report that showed abrupt slowing but perhaps out of Canada. Manufacturing sales in Canada were surprisingly robust in January. A 1.0 percent monthly rise was the first increase since last September and with yearly growth rising from 1.0 percent to 4.4 percent. Volume shipments were slightly firmer, advancing 1.4 percent versus December for annual growth of 2.6 percent. Sales were up in 15 of 21 industries. Food manufacturing (2.8 percent), electrical equipment, appliance and components (13.0 percent), wood products (3.4 percent) and motor vehicle parts (3.0 percent) all enjoyed solid demand. Partial offsets were declines in aerospace product and parts (12.4 percent) and paper manufacturing (2.7 percent). Petroleum and coal products were flat.

The bottom line

The weight of the global economic data pivoted to the downside at year end and though there are some indications of a first-quarter bounce back, central bank policy is likely to continue to move toward an accommodative emphasis. Helped by this emphasis, global stock markets are doing very well right now and are offering no danger signals that any deepening in global slowing is expected.

Global monetary policy will be the coming week's theme starting with minutes from the Reserve Bank of Australia and Bank of Japan followed by a Federal Reserve meeting that is set for Wednesday, one that will include new economic forecasts which, despite whatever good news that may be appearing, are expected to be downgraded. The Swiss National Bank and Bank of England will also be meeting.

The week's economic data will be highlighted by the Ifo and ZEW sentiment surveys out of Germany, retail sales out of the UK, and a round of European flash PMIs for March. Trade data out of Japan and Singapore will offer new clues on the effects of U.S. trade tensions while residential property prices will offer the latest readings out of Australia's housing sector.

**Jeremy Hawkins and Brian Jackson contributed to this article

Looking Ahead: March 18 through March 22, 2019