The week’s biggest news was the UK’s invocation of Article 50, formally beginning “Brexit.” Numerous people have offered commentary on this event. But there are only 2 firm conclusions anyone can draw about the situation. First, the EU will make sure that the UK experiences large enough economic pain to dispel other countries from leaving the EU. This is especially important due to the rise of populist political movements in France and Germany, similar to the one that caused Brexit. Second, the UK will experience slower growth in the medium and longer term. The EU is a large, integrated community that provides a natural market for the UK. After they leave the union, they will undoubtedly have unequal access to the continent which will slow domestic growth.
Japanese news was modestly bullish. Industrial production’s 4.8% Y/Y increase was the best news. This coincident indicator is now in a year-long uptrend that is approaching recent highs:
Although the unemployment rate decreased to 2.8%, it is not translating into wage gains. Bloomberg explains why:
Hiroaki Muto, chief economist at Tokai Tokyo Research, said the lower jobless rate isn’t leading to higher wages because companies are hiring people on "poor terms":
In theory, the narrowing supply-demand gap and falling jobless rate decide wages, but in the Japanese economy nowadays, productivity and growth potential rate are dictating wages.
Recent Federal Reserve research came to the same conclusion; that weak productivity gains were the primary reason for weak U.S. wage growth, not a diminishing labor supply. Inflation rose a modest .1% M/M and .3% Y/Y. And retail sales continued to increase, rising .1% Y/Y. This continues their recent advances into positive territory:
Overall, Japan continues to limp higher.
Early in the week Peter Praet gave a speech on the EU economy that contained the following synopsis of the EU’s current economic condition:
The economic recovery will support domestic price pressures. Indeed, the upswing is continuing at a steadily firming pace and is broadening across sectors and countries. The recovery has proven to be resilient against past external shocks and influences. In fact, real GDP growth in the euro area has expanded for 15 consecutive quarters, growing by 0.4% during the final quarter of 2016. Economic sentiment is at its highest level in nearly six years and unemployment is at its lowest level in nearly eight years. Looking beyond the euro area, there are signs of a somewhat stronger global recovery and increasing global trade. So overall, as economic conditions are improving, also the risks surrounding the euro area growth outlook have become less pronounced, although they remain tilted to the downside, mainly because of global factors.
Since the end of the Great Recession, analysts have been looking for the moment when the major economic regions’ accelerated to “escape velocity” – the pace of growth where monetary and fiscal stimulus was no longer necessary. No region is there yet. But as the above quotation explains, the EU continues to inch toward that elusive goal.
Two releases confirm that the region continues to grow. Overall inflation, which was 2% in the previous report, rose 1.5% in the latest release; core inflation increased a more modest .7%. This decrease in the monthly numbers grants the ECB a bit more maneuvering room for their policy low interest rate and asset purchase policy. Second, Household loans increase 2.3%, .1% from the previous month. Loans to non-financial corporation decreased .3% to 2%. But overall, EU credit growth appears to be on solid footing:
The only news from the UK was the final revision to 4Q16 GDP, which was unchanged from the .7% previously reported. Households are still driving growth: their pace of consumption was up .7%. While gross fixed capital formation increased .5%, business investment declined .9%, indicating that Brexit is negatively impacting UK business sentiment:
Finally, Canadian GDP increased .6% from December to January. The numbers were more impressive on a Y/Y basis: goods producing industries advanced 2.4% while the serve sector grew 2.2%. This chart from the release shows that Canada has clearly shaken off the negative impact of weak oil prices:
Overall, this week’s news was positive. Japan continues to improve as does the EU. While Brexit will undoubtedly slow UK growth in the medium term, it has yet to show up in the economic figures. And Canada appears to have emerged from its’ oil price induced slowdown.