Macroeconomics: The Day Ahead for 13 December

A busy day for statistics and Eurozone national central bank forecast updates, following on from the ECB’s yesterday, awaits markets to close out the week. Whether the array of Japan’s Q4 Tankan survey, UK monthly GDP, activity indicators and GfK Consumer Confidence and German Trade, with US Import Prices ahead can stir markets’ animal spirits is a different question, with the BoE, BoJ and FOMC meetings looming in the headlights next week, which will also be the last full trading week before year end. Yesterday’s forecasts from the leading German research institutes offered little in the way of optimism for 2025, with the IfW in Kiel predicting that GDP will stagnate after a drop of -0.2% y/y this year, while the DIW in Berlin echoed the IfW for 2024, but sees a marginal 0.2% increase in 2025. By contrast Ifo offered two scenarios: the first assumes that structural challenges will remain in place and keep growth weak at just 0.4% (in my view most likely), while the secondary scenario sees the potential for a 1.1% y/y rebound if those structural challenges can be at least partially overcome, much of that will depend on the February election outcome. Today’s updated Bundesbank forecasts will likely echo those of the IfW and DIW.

As for the ECB post mortem, the cuts to growth and inflation forecasts were as unsurprising as the 25 bps rate cut, but the move to drop all references to keeping ‘restrictive’ policy served to underline that more cuts will be forthcoming, with Lagarde again reiterating that “the direction of travel is very clear.” That said there was some residual hawkishness in Lagarde’s response to a question about assuming further rate cuts: “We are getting closer, but we are not done. When you still have 4.2% domestic inflation and wages of which growth is slowing down, you have to be very cautious”, though it is clear that weak growth expectations are at the top of the ECB’s concerns, with risks described as being tilted to the downside, and the statement emphasized that policy was now about making sure “that inflation stabilizes sustainably” around the 2.0% target. While Lagarde said there was no discussion about the neutral rate, and that it “can’t be determined with precision”, she did refer to an ECB paper which suggested it is somewhere between 1.75% and 2.50%, rather lower than the 2.0-3.0% suggested by Schnabel.

The larger than expected SNB 50 bps rate cut did trigger a sell-off in the CHF, but this will likely prove to be short-lived given that Schlegel appeared very reticent about entertaining a renewed move back into negative rates territory, though he did not rule it out, and did emphasize that negative rates may be unpopular, but ‘they do work’. Coming hot on the heels of Chinese ‘sources’ suggesting that one response to Trump tariffs would be to allow a sharper devaluation of the CNY, implies that one theme for 2025 will likely be ‘currency wars’, and a good deal more currency volatility.

** U.K. – October GDP & activity indicators **

– It would be easy to blame the unexpected but very modest consecutive contraction in monthly GDP on budget related uncertainty, but anecdotal evidence suggests that some companies brought forward spending plans to pre-empt the budget, while others delayed investments. The fact that the weakness was broad based, with Services flatlining, while Manufacturing and Construction contracted quite sharply, and Net Exports were also a drag, with Exports ex Precious metals falling in 3 of the past four months, while Imports rebounded from a sharp drop in September. This will not be a game changer for the BoE next week, with all surveyed forecasters expecting the MPC to hold rates, and to cut again in February. But with the boost from planned government spending in H1 2025 likely to be transient, and a poor post-Budget mood and a large array of uncertainties about the global economic outlook, the UK economy looks likely to do no better than limp along, and remain way off the new Labour government’s aim to boost growth to 2.5%.

** Japan – Q4 BoJ Tankan survey **

– Overall, the survey was modestly better than expected, with large company sentiment indices for Manufacturing around their 10-yr average, and still well above their pre-Covid average for Services. While the survey was unlikely to sway (the likely unchanged) BoJ rate decision next week, the fact that companies expect CPI to run above target at 2.4% y/y in 2025 is a green light for further BoJ tightening, along with the robust large All Industry CapEx intentions at 11.3%. The challenge for the BoJ lies in wage settlements, with evidence pointing to small companies struggling to match the hefty large company settlements given that wage bills already amount to about 70% of profits, even if a purge of the large proportion of ‘zombie’ companies is long overdue, and to a large extent inevitable once the BoJ started to hike rates.