Strategy: US and eurozone consumers are central to growth prospects

23 Mar 2016


  • Eurozone leading indicators suggest growth is holding up
  • Larger US inventories: more of a headwind for manufacturing than for the whole economy
  • Japan could be on the way to recession; more BoJ action expected
  • Asset allocation remains cautious

Two weeks ago, we discussed the weak signal from the OECD’s leading indicators and now we’re closely watching the latest purchasing managers’ indices (PMIs) for confirmation. Eurozone PMIs have held up quite well. For Japan, the picture is less rosy.

While the recent rally in equity markets has taken the S&P500 back into positive territory for the year, bourses in Europe, Japan and China are still in red. In US dollars, the MSCI Emerging Markets index is back in the black. After the recent swings on changing growth prospects and monetary policy, bond yields were more stable.


With the US economy currently going through a soft patch, growth in China slowing and Japan’s economy struggling, the question is whether the eurozone can maintain growth at around or slightly above its long-term potential, especially since the tailwinds from falling crude oil prices and a weak euro look set to fade this year. We expect growth to hold up as domestic consumer spending and business investment become more important drivers.

The PMIs for March support this view. The composite PMI beat expectations, as did the services PMI. The relative strength of the latter signals that domestic growth is indeed holding up. In France and Germany, the services sector did better than manufacturing, with the French manufacturing PMI falling back to below 50 – the threshold between expansion and contraction.

The one point jump in the German Ifo index was also positive, although it came after a relatively steep decline. So we believe it is too soon to sound the all-clear, especially since consumer spending and consumer confidence have fallen from their mid-2015 peak and exports and manufacturing orders slipped in both December and January.


The US manufacturing PMI came in slightly below market expectations after strength in regional measures of producer confidence had raised hopes for a bigger gain. One reason to be cautious is the rapid rise in inventories – adjustments lie ahead. While the effect on GDP growth could be limited, the impact on the manufacturing sector may be more pronounced.

Meanwhile, consumer confidence has fallen for the third straight month and at a more rapid pace. Consumers’ assessment of the current situation as well as the outlook worsened. From a labour market perspective, consumers should not have to worry. Increasing employment provides support for household income as do modest rises in house prices. All in all, we expect consumption to continue to support US growth.


Japan’s manufacturing PMI turned out to be a disappointing number and could indicate that the economy is heading for a technical recession. According to our proprietary nowcasting index, which indicates where the economy is heading, growth slowed recently. Indeed, a range of leading indicators has weakened. A tight labour market lacking major wage gains is a familiar problem, not just for Japan, but also globally. Specifically in Japan, the number of part-time and non-regular workers is increasing, which could keep a lid on wages.

So far, the spring wage negotiations have disappointed with the major car makers and electronics firms having agreed to smaller base pay increases than they did a year ago. With modest income growth and a dip in consumer confidence, it looks unlikely that consumption can provide much support for the economy. And with imports increasing and exports falling, net trade could be a drag on growth. Thus, the economy may indeed be heading for a recession.



In our core strategies, we are underweight developed equities, particularly in Europe, and underweight emerging market debt in hard currency. In our total return strategies, our exposure to equities is historically low. We expect equity markets to struggle in this environment. Apart from the dimmed prospects for economic growth, inflation, monetary policy and corporate earnings, we see geopolitical risks for equities and other risky assets.

In the US, the soft patch may be ending, but consumers are cautious and the manufacturing sector must cope with high inventories. For us, the monetary policy outlook is murky. Some Fed officials have argued for higher rates soon, while others have been more dovish.

Amid weak growth, the Bank of Japan could shortly provide more stimulus. It could push policy rates further into negative territory, especially as adjustments to the tiered deposit interest-rate system should cushion the effect on bank margins and profits. However, the impact on the economy is questionable and even more so on markets. A higher pace of quantitative easing and broader equity purchases under the QE programme could be received more favourably.

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Please note that this article can contain technical language. For this reason, it is not recommended to readers without professional investment experience.