US GDP data weakest of a disappointing lot Data released today show that Q1 2017 real GDP growth: In the US slowed to 0.7 quarter-on-quarter (qoq) annualised, from 2.1% qoq in Q4 2016 – the weakest growth rate in three years (see Figure 1); In the UK halved to 0.3% qoq – the weakest growth rate in a year; In France slowed to 0.3% qoq from 0.5% qoq in Q4 2016; and In Spain rose to 0.8% qoq from 0.7% qoq in Q4 2016.

1. 1
US, UK and global GDP growth update – Put the champagne on ice
US GDP data weakest of a disappointing lot
Data released today show that Q1 2017 real GDP growth:
- In the US slowed to 0.7 quarter-on-quarter (qoq) annualised, from 2.1% qoq in Q4 2016 – the
weakest growth rate in three years (see Figure 1);
- In the UK halved to 0.3% qoq – the weakest growth rate in a year;
- In France slowed to 0.3% qoq from 0.5% qoq in Q4 2016; and
- In Spain rose to 0.8% qoq from 0.7% qoq in Q4 2016.
Figure 1: US GDP growth slowed to 3-year low in
Q1 2017…
Figure 2: …which may test FOMC’s implicit
expectation of 3 rate hikes in 2017
Source: US Bureau of Economic Analysis Source: US Federal Reserve
The US data were arguably the weakest in a weak lot and will once again shine the spotlight on whether
the Federal Reserve should and will hike its policy rate a further two times before end-2017 – as implied in
the FOMC’s “dot chart” (see Figure 2). Market pricing for a 25bp rate hike in June has been pretty volatile
so far in April and I will detail next week my view on the Fed’s tightening path for the remainder of the year.
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-1
0
1
2
3
4
5
6
2010q1 2012q1 2014q1 2016q1
US GDP
Quarter-on-quarter % annualised change
50
55
60
65
70
75
80
85
90
95
2017 2018
Dec-16 Mar-17
FOMC rate hike forecast, bps (weighted average)

2. 2
Following today’s releases, the Dollar has weakened (albeit modestly) against the euro and in particular
Sterling. The euro remains pray not to only to modest eurozone GDP growth but also, in my view, to the
ECB’s arguably still cautious (read dovish) language and (in the view of many) the still uncertain outcome
of the French elections due to play out on 7th
May 2017.
According to opinion polls, the gap between centre-left independent candidate Emmanuel Macron and
National Front leader Marine Le pen has narrowed to 20 percentage points (pp) from 28pp only a week ago
(see Figure 3). Macron was slow to reboot his election campaign following his win in the first round of
voting on 23rd
April. However, Le Pen and her party have come under scrutiny following reports that the
European Parliament now estimates that National Front party fake jobs cost the institutions nearly €5mn
versus an initial estimate of €1.9mn. Moreover, the (provisional) National Front leader – Jean-François
Jalkh – who only took over from Le Pen on 25th
April stepped down today following the release of
comments he made in 2005 in which he seemingly denied the existence of the Holocaust.
Figure 3: Macron’s lead against Le Pen has narrowed as a result of a shaky start post-first round
Source: Les Echos
Nine days is a long time in politics and an eternity in French presidential elections and much can change
between now and next Sunday when up to 46 million registered voters go to the polls. However, I am
sticking with my core scenario that Macron will be elected President (see 7 reasons why Macron will
become President and market implications, 25 April 2017).
30
35
40
45
50
55
60
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70
16-Mar 20-Mar 24-Mar 28-Mar 01-Apr 05-Apr 09-Apr 13-Apr 17-Apr 21-Apr 25-Apr 29-Apr
Macron Le Pen
Voting intentions for second round of presidential elections, %

3. 3
Global GDP growth likely to have risen only modestly in Q1 2017, if at all
The implications from today’s GDP data releases are potentially numerous and include the possibility that
year-on-year global GDP growth at best rose only modestly in Q1 2017, as has been the case in the past
three quarters (see Figure 5). Major economies which have so far released Q1 data account for about 40%
of world GDP (on a purchasing power parity basis), according to my estimates. A weighted average of GDP
growth in these eight economies was broadly unchanged from Q4 2017 at 3.74% yoy (see Figure 4). Only
three economies recorded faster year-on-year growth in the quarter – the UK, China and South Korea –
while growth in Spain was unchanged from Q4 2016 at around 3.0% yoy.
Figure 4: GDP growth in major economies which have released Q1 data points to possible stagnation….
Source: National Statistics Offices, IMF
The global manufacturing PMI has historically been well correlated with global GDP growth and the pick-up
in the PMI in Q1 to a multi-year high of 52.9 suggests that GDP growth accelerated further in the quarter
(see Figure 5). This would also corroborate the IMF’s conclusion in its latest April 2017 update that “global
economic activity is picking up” and the ECB’s assessment at its policy meeting on 27th
April that “Incoming
data, notably survey results, bolster our confidence that the ongoing economic expansion [in the eurozone]
will continue to firm and broaden.
0
1
2
3
4
5
6
7
8
US (16.5%) China
(14.7%)
Korea
(1.7%)
France
(2.6%)
Taiwan
(1.0%)
Singapore
(0.4%)
UK (2.5%) Spain
(1.6%)
Total
Q4 2016 Q1 2017
Real GDP, % year-on-year (figure in brackets is share of world GDP in PPP-terms)

4. 4
Figure 5: …but global manufacturing PMI still suggests modest pick-up in global GPD growth in Q1 2017
Source: National Statistics Offices, IMF, Markit
But the risk, in my view, is that if GDP growth in other major economies due to release Q1 data in coming
weeks disappoints as it has done in the US, France and to a lesser extent the UK, global growth will have
failed to make any credible inroads in Q1 (see Figure 6). To be clear, global growth is a long way from
recessionary territory but many international institutions, including central banks, have seemingly based
their core scenarios on global growth rising further. If these bullish prognoses prove a little premature, it is
at least conceivable that a re-calibration of the language (if not policy) will ensue.
Figure 6: GDP in countries yet to release Q1 data hold the key
Source: National Statistics Offices
Release date for Q1 2017 GDP data - Main economies
Country Release date Q4 2016 (% YoY) % of world GDP (IMF PPP)
Indonesia 05-May 4.9 2.3
Germany 10-May 1.2 3.7
Italy 16-May 1.0 2.3
Russia 17-May 0.3 3.4
Japan 18-May 1.6 4.7
India 31-May 7.0 6.2
Canada 31-May 1.9 1.5
Brazil 01-Jun -2.5 3.2
Australia 07-Jun 2.4 1.0
2.0
2.5
3.0
3.5
4.0
48
49
50
51
52
53
54
2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4
Global manufacturing PMI (left scale) Global real GDP, % year-on-year (IMF methodology)

5. 5
Collapse in UK retail sales contributed to halving of GDP growth in Q1 2017 to 0.3% qoq
UK GDP growth more than halved to a one-year low of 0.3% quarter-on-quarter (qoq) in Q1 2017 from
0.66% qoq in Q4 2016, according to preliminary data released today by the Office of National Statistics
(ONS) – see Figure 7. The supply-side data show that the slowdown in growth in services, which account
for about 79% of the UK’s GDP, to 0.3% qoq in Q1 from 0.8% qoq in Q4 2016 was responsible for the bulk
of the slowdown in headline GDP growth (see Figure 7). The ONS confirmed that the 1.5% qoq contraction
in the volume of retail sales in Q1 – the largest in seven years – (see Figure 8), which was due to rising
inflation, had shaved almost 0.1 percentage points off headline GDP growth.
Figure 7: UK GDP growth slowed to 0.3% qoq in
Q1, as did service sector output
Figure 8: Fall in retail sales in Q1 large contributor
to lacklustre GDP performance
Source: Office of National Statistics Source: Office of National Statistics
This is very much in line with my view that contracting real wages (see Figure 9) alongside slowing
unsecured consumer borrowing (see Figure 10) has lead retail sales to shrink which is in turn weighing on
UK GPD growth (see French politics, UK macro data and possible GBP/EUR downside, 21 April 2017). I
first identified this risk in August (see UK economy post referendum – for richer, but mostly for poorer, 26
August 2016). At the heart of the problem is the fact that workers’ nominal earnings are simply failing to
keep up with rising inflation. One explanation is that despite the fall in the pool of available labour, workers’
power to negotiate higher nominal earnings remains weak, resulting in real weekly earnings falling in 9 of
the past 13 months and 1.3% between November 2016 and February 2017 (see Figure 9).
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0.8
1.0
1.2
1.4
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
2016
Q3
2017
Q1
Services sector GDP
% quarter-on-quarter (seasonally adjusted)
107
109
111
113
115
117
119
Sep-15 Jan-16 May-16 Sep-16 Jan-17
Excluding automobile fuel sales
Including automobile fuel sales
UK retail sales volume
seasonally adjusted (2013 = 100)

6. 6
Figure 9: Real weekly earnings down in 9 of the
past 13 months
Figure 10: Slowing unsecured borrowing
Source: Office of National Statistics Source: Bank of England
It is perhaps premature to conclude that UK GDP growth will struggle to pick up in coming quarters given
the series’ volatility. After all, GDP growth slumped in Q1 2016 to a three-year low of 0.15% qoq before
rebounding to 0.63% qoq in Q2 2016 (see Figure 7). Also, while the services sector is clearly struggling,
manufacturing output – which accounts for about 10% of UK GDP – rose 0.5% qoq in Q1, thanks in part to
the gain in currency competitiveness as a result of Sterling’s depreciation following the 23rd
June
referendum. I estimate that in order for GDP growth in 2017 to match the 1.8% recorded in 2016, growth
would have to average about 0.4% qoq for the remaining three quarters while it would have to average over
0.5% qoq in order to hit the IMF’s upwardly revised forecast of 2%.
However, retail sales would likely have to pick up markedly in coming months in order for household
consumption growth to again meaningfully add to headline GDP growth. This is a tall ask unless real
earnings recover forcefully given that banks’ tighter lending standards will likely continue to curb household
borrowing (see Figure 11). The fall in the pool of available labour – which I define as workers who are
unemployed, part-time employed and out of the labour force but willing to work – suggests that nominal
weekly earnings growth should start rising from a currently tepid 2.3% year-on-year (see Figure 12). But
this has yet to happen, which points to workers still not enjoying much wage-bargaining power.
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505
Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17
Weekly earnings including bonuses, constant
2015 prices, seasonally adjusted (£)
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5
6
7
0
5
10
15
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30
Mar-07 Apr-09 May-11 Jun-13 Jul-15
Secured
Unsecured (right scale)
UK - Net lending to individuals
3-month rolling sum (£ billions)

7. 7
Figure 11: Borrowing under pressure as banks
expect to further tighten lending standards
Figure 12: Falling pool of available labour but
workers struggling to negotiate higher earnings
Source: Bank of England Survey Source: UK Office of National Statistics
Note: * Includes bonuses
Moreover, business investment, which has stagnated since Q4 2015 and thus added nothing to overall
GDP growth, is unlikely to pick up materially in my view given the uncertainty generated by the UK’s
scheduled exit from the EU in March 2019.
With the above in mind, I see the risk tilted towards GDP growth remaining rather lacklustre in coming
quarters, despite record-low interest rates, UK exporters benefiting from Sterling’s weakness and the (albeit
tepid) recovery in global GDP growth. This would in turn reinforce my long-held view that the Bank of
England is likely to look through any temporary rise in inflation and keep its policy rate unchanged at 0.25%
for the foreseeable future (see Bank of England and inflation – sense of déjà-vu, 24 March 2017).
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-10
0
10
20
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2007Q2 2009Q2 2011Q2 2013Q2 2015Q2
Past 3 months
Next 3 months
Change in availability of unsecured credit to UK
households (net percentage balance)
-4
-2
0
2
4
6
8
109
10
11
12
13
14
Jan 03 May 06 Sep 09 Jan 13 May 16
Unemployed, part-time workers and
inactive but want a job (millions)
Average (nominal) weekly earnings, %
year-on-year (right scale, inverted)*