Europe Showing Signs of Life

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. One of the dominant themes in the recent past has been the U.S. economy growing faster than Europe and some concerns about a slowing China. But is that growth starting to balance out? I'm here with Bob Johnson, our director of economic analysis, for his look at the data.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's start in Europe. They've been very aggressive, at least recently, in terms of quantitative-easing programs, in terms of trying to weaken the euro against the dollar. Are there any signs that these policy moves are starting to have an appreciable effect on the European economy?

Johnson: Absolutely. We've had some individual-country numbers, but we've got the rolled up industrial-production numbers for February, which are probably just a little bit dated. But they're showing an accelerating trend in industrial production, about 1.6% growth, which is better than the couple tenths [of a percent] that they had been growing. So, clearly, things seem to have turned the corner there a little bit. And then very recently, we just got some of the inflation data. Inflation in Germany looks up--it's up 0.5%. In France, it's up 0.7%. So, maybe we've started to lift off of that deflationary spiral that looked like it was about to set in. So, clearly, some things have started to work there.

Then, one other thing in Europe, too, is that the trade surplus has begun to move up again. It was about 7 billion [euros] a month, and now it's up over around 20 billion [euros]. So, clearly, it's improved, and it indicates that maybe the falling euro is beginning to have its desired effect and is really beginning to help their economy.

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Glaser: So, is Europe out of the woods now? Is this the end of their doldrums? Are they going to be able to grow more or is this more of a temporary boost?

Johnson: I think they are probably going to have a real boost, but it's not going to last very long. I think that when you've got a currency this cheap, it certainly helps out in a big hurry. But on the other hand, if they don't fix some of the structural things with their labor and tax policy and corruption policies, they're certainly going to still have a rough go of it. So, they've got a little bit of a reprieve here. And if they will begin to take structural actions, they will move ahead. If they don't, this will last a year, year and a half, or maybe even two years, and then they'll fade back again.

Glaser: So, some positive signs out of Europe. Now looking at China, we got their growth data. A big worry has been what's the impact of a [slowing] China on emerging markets and the rest of the globe. What did we see from them?

Johnson: The number, on a headline basis, came in at 7% growth for the first quarter. So, they're the first one of the major economic blocs that's had a number out here for the first quarter. It was pretty much in line with expectations, but still one of the lowest numbers we've seen for years out of China. So, the expectations were low for them, and we got a relatively low number. But a little more worrisome is that they released a bunch of other economic data on the same day, and certainly some of those numbers were a little bit less good.

Retail sales were still a little bit soft--not as much as anticipated. Industrial production was particularly disappointing--in the 5% to 6% range. So, clearly, some slowing especially in the industrial sector there. So, again, not a wonderful market. But keep in mind that China's currency is tied pretty closely to the U.S. dollar, so as the dollar has gotten stronger, it's also made Chinese products a little bit less competitive. I think that may be some of what's sinking in in the export data and fits this whole picture together that we're seeing.

Glaser: Do you see any prospects of the Chinese central government being more aggressive in terms of trying to boost the economy or are they happy with these slower rates?

Johnson: Well, I think they have already tried to be more aggressive. We saw a few weeks ago where they made it easier to take out a loan for a second home. In other words, if you're transitioning from one home to another, it used to be very difficult to get a mortgage, and you had to have huge amounts down. Well, now they've made it easier to do and made the amount of the down payment smaller. So, clearly, they are kind of "on it," if you will, to try to help the economy out. And certainly, with all of their encouragement of the stock market, things have probably gotten a little bubblish in some of their stock market activity, and that may encourage people to spend a little bit, too. But clearly, there are some worries out of China. I still think the long-term growth-rate estimates of 6% or 7% are way too high and that, over the next five years, it will be more like 3% to 5% growth out of China. And that will affect worldwide growth.

Glaser: Now looking at the United States, we're seeing better news out of Europe and kind of not-so-great news out of China. Where does the U.S. fall in this? Does the economy still look strong?

Johnson: I think that we've had two or three months--maybe even four months--where the data has looked really sloppy. You can pick a data point and it's been a little bit weaker than one would have hoped. Certainly, some of it has been weather-related, and it's kind of odd pieces of weather--it's not one uniform pattern. We had a really warm December, which slowed a lot of winter sales, and so that number didn't look so good. And then we had a February that was almost as bad as it was a year ago. So, we had a very unusual situation with weather patterns really messing up the numbers. And I always get a little worried about economic data when you've got inflation rates shifting so much--that somehow something hasn't been counted just right. So, I'm a little worried about the underlying data itself.

We had three or four pretty rough months, but the one piece of data that I really wanted to see up [did go up]. Retail sales were out this week. We were up 0.9%; even if you strip out autos, we were still up 0.4% or 0.5%. So, clearly, it was a nice rebound from three kind of lackluster months on a sequential basis. And the year-over-year inflation data has been pretty stable at 4.5% to 5% for the last five or six months. This month-to-moth data gets a little silly to look at, especially with those weather trends I pointed out.

Glaser: What about industrial production?

Johnson: Industrial production: That's one where we seem to be eroding a little bit. We had kind of talked for a long time about how with manufacturing everything possible went right in 2014. And in 2015, auto sales haven't been quite as good as they were; we've had things that are exported or commodity-related not doing so well. So, there's been a number of pressures--and plus the oil and gas situation. They've all weighed on production. We thought it would. Industrial production had been down three months in row--even the manufacturing component had been down three months in a row.

Now, at least, the manufacturing portion has lifted back up. It was up 0.1%. Not a lot to write home about, but it did better. But maybe we've at least put a bottom on some of the industrial-production numbers. But I think, for the full year, we're going to come in at 3% growth in industrial production versus the almost 5% that we had last year. So, clearly, a slowing there. It's a reason we've been a little bit negative on the economy. The good news is that it doesn't look like we're totally falling apart in the industrial-production sector. We just have a little bit slower growth.

Glaser: But we should be ready for a weak reading on that first-quarter GDP?

Johnson: Absolutely. I think with the U.S. GDP number, pick a number. Inventories are the big question. But I think it will be between no growth at all and 1%, which will still be better than the negative 2.2% that we saw a year ago in the first quarter--that, by the way, we came back from. But I do think there is a potential for a negative surprise on that GDP number.

Glaser: Bob, thanks for your take today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.