The economic dataflow has shown a “rare degree of divergence” recently, according to UBS analyst Andrew Cates.High regional correlations between various surprise indices have broken down.
Positive surprises have been increasing in the U.S. for most of the year, except for a brief reversal in March and April. Asia has also outperformed expectations. But Europe’s data has disappointed recently.
Purchasing manager indices (PMIs), which often act as an indicator of how the surprise index will perform, suggest that Europe’s economy will continue to struggle, while the U.S. economy will strengthen.
Cates points out four main reasons behind these unusual divergences:
- Banking stress in Europe, relative to the U.S. has been behind the divergence in PMI data. Broad money growth has picked up in the U.S. while Europe has seen “credit restraint”. U.S. credit growth has been driven by corporate lending activity and recently consumer lending activity.
- Meanwhile, demand for corporate and household credit has picked up in the U.S. but has plunged in Europe.
- The process of aggregate deleveraging in the U.S. is closer to being complete in the U.S. than many market commentators think, while this isn’t the case for many Western European economies.
- The U.S. has export competitiveness compared with Europe since the dollar has weakened in value in recent years compared with the euro which has seen “fairly dramatic appreciation”.
Cates thinks these divergences will persist in the near term.
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