The most encouraging sign was the rebound in the China index which rose from 48.1 in April to 49.7 in May. The improvements came in the right areas with increases in the output, new orders and new export orders sub-indices. That supports our contention of a stabilisation in the recent weakness in activity is occurring, although it is unlikely to prevent a further softening in GDP growth into the second quarter. From a policy perspective it supports the case a continuation of the Government’s “fine tuning” approach to stimulus rather than anything more aggressive.
Japan’s index nudged a tad higher in May to 49.9 from 49.5 in April, but that comes after hefty declines in the two prior months. This is the unwinding of the strong growth recorded in the March quarter (+1.5% qoq) as a result of the bringing forward of expenditure ahead of the consumption tax increase on April 1st. We expect GDP to contract 1.0% in the June quarter and to remain soft thereafter. We continue to believe the Bank of Japan will be easing again from about July.
The Euro zone index was disappointingly soft, falling from 53.4 in April to 52.5 in May. This result follows the weaker than expected March quarter GDP result which came in at +0.2% compared with the average market expectation of +0.4%. With little reason to be optimistic about the growth outlook, we continue to be happy at the bottom end of market expectation for calendar year GDP growth. Furthermore the output price index remained under 50 underlining downside risks to inflation which supports our expectation of further ECB easing when the Governing Council next meets on June 6th.
In the US the index rose for the second consecutive month to now stand at 56.2. That supports the view that the economy will bounce back from the weather-induced weakness in the March quarter. That said there is reason to still be cautious about the quantum of the bounce with weaker than expected industrial production in April and flat retail sales (albeit flat following a strong March increase). March quarter GDP is likely to be revised down from the initial print of an annualised +0.1% but the June quarter is likely to come in around 3.5-4.0%. However we don’t expect that pace to be maintained for the rest of the year. We’re still happy with our below consensus forecast of annual average growth of 2.5% for the 2014 calendar year.