By Padraic Halpin
DUBLIN A temporary government shutdown with no end in sight, rising trade conflicts and a global growth slowdown: the first quarter outlook for the U.S. economy did not look promising at the turn of the year.
But Friday's gross domestic product data for the first three months of 2019 could strengthen the case that while the current period of global expansion is in its late stages, some of the biggest contributors have yet to run out of steam.
After China's economy defied expectations that it would slow further in January-March, U.S. growth is expected to be 2.1 percent in the same period, although the range of analysts' estimates was wider than usual at 1.0 to 2.9 percent.
If the Atlanta Federal Reserve's GDPNow model, based on data already released, is to be believed, growth will come in almost at the top of that range and bang in between the 2.2 percent pace seen in Q4 2018 and July-September's brisk 3.4 percent.
"Despite all the prophecies of doom, the U.S. economy did not collapse in the first quarter," said Commerzbank (DE:CBKG) economist Christoph Balz.
"On the contrary, next week's GDP figures are likely to show decent growth. In addition, companies have boosted investment, which argues against an imminent recession."
The Atlanta Fed raised its expectations after data last week showed domestic retail sales grew at their strongest pace in 1-1/2 years in March, the latest indication that growth in the quarter bounced back quickly after the longest shuttering of federal agencies in U.S. history ended on Jan. 25.
While a surprise narrowing in February's U.S. trade deficit also implied a much stronger pace of growth, weak manufacturing output -- which resulted in the first quarterly drop in production since President Donald Trump's election -- may explain the wide range in estimates.
The main wild card for Friday's release could be private inventories, according to a number of analysts, including Unicredit (MI:CRDI), whose 1.3 percent GDP forecast sits at the more pessimistic end of the range.
"After pronounced stockpiling in the second half of the year, our forecast assumes that inventories were a significant drag in Q1. The latest numbers suggest that the drag may occur only later," Unicredit analysts wrote in a note.
"CAUSE FOR HOPE"
The other key piece of data in a relatively quiet week is Germany's Ifo business climate index, the main sentiment reading for Europe's biggest economy, where the growth outlook has drifted in the opposite direction.
The German government cut its 2019 growth forecast for the second time in three months last week and now sees the economy growing just 0.5 percent as exporters struggle with weaker demand from abroad, trade tensions and uncertainty over Brexit.
Subsequent business surveys showed that while German manufacturing contracted for the fourth month in a row in April, buoyant services activity compensated. Wednesday's Ifo print may offer some slight additional relief.
After a surprise rise in the March index to 99.6, analysts polled by Reuters see a further marginal improvement to 99.9, matching a brighter mood among German investors after last week's ZEW survey improved for a sixth month.
"We believe the ZEW survey revealed that Germany's economy is not out of the woods yet considering its most recent bout of weakness, but there is recent cause for hope again," said Elmar Voelker, senior fixed income analyst at LBBW.
"Transferring the findings to the Ifo Business Climate Index, we would predict that Germany's most important leading economic indicator will show its second successive rise in April, but the jump will be less significant than in the previous month."