Our round-up of major economies; featuring charts and commentary.
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Macro forecast charts and commentary
The US economy has slowed through 2019 as the global weakness in manufacturing and trade has spread.
That weakness follows the further escalation of the economic conflict between the US and China. It has been accompanied by higher inventories, reduced capital expenditure plans and slower employment growth – consistent with a negative demand and confidence shock.
However, the consumer has been resilient, with strong disposable income growth supporting consumption and the non-manufacturing sectors.
Looking ahead, the extent of the slowdown will be a function of the trade war, the response of the Federal Reserve and the resilience of the consumer. We expect the Fed to cut rates once more in 2019 and again in 2020. We do not expect a recession, but see the risks tilted in that direction.
Figure 1. US
After the upside surprise in Q1, euro zone GDP growth slowed sharply in Q2 to a below-trend pace and there are no signs of any noticeable pick up in Q3.
The malaise in the manufacturing sector has got incrementally worse, largely because of the slump in global trade which has hurt exports. More worryingly, there are limited signs that weakness is being transmitted to the more domestically focused service sector which, until now, has remained reassuringly resilient. In contrast to many businesses, households are still reasonably upbeat, while some money and credit indicators have improved modestly.
Nevertheless, the additional stimulus promised by the ECB is warranted, especially as inflation – to which they have now directly linked monetary policy – is still troublingly low. Fiscal policy should also lift demand at the margin, but is unlikely to be a game-changer.
Figure 2. Euro zone
The drop in GDP seen in Q2 may not be repeated in Q3, but growth in the UK remains worryingly weak.
Alongside the headwinds to exports from the recent stagnation in world trade, sentiment at home is being hurt by the Brexit turmoil. Unsurprisingly, this combination has already impacted business investment as companies have held back on discretionary capital spending because of the uncertainty.
Such expenditure may not have collapsed, but it has dipped in five of the last six quarters and looks set to fall further. If employment growth also slows, or even reverses, as some surveys suggest (especially in the event of a No Deal exit), then growth could slow much more. Binary Brexit outcomes make it difficult to forecast macro variables as they are so path dependent.
Figure 3. UK
Policymakers have reacted to the imposition of increased tariffs and the global slowdown with renewed fiscal stimulus and liquidity measures.
Growth is still moderating towards six per cent going into 2020, and trade will continue to be a drag. The USD/CNY exchange rate was allowed to depreciate 6 per cent, to above 7.0; this will cushion the trade war’s impact for exporters but also weaken Chinese demand for the rest of the world’s goods.
For now, Chinese authorities have refrained from aggressive monetary measures, but have begun to cut the new LPR rate slowly while continuing RRR cuts; similarly, a big, leverage-fuelled infrastructure binge orproperty boom is not on the cards.
A minor trade deal is a possibility, but full de-escalation is extremely unlikely given political constraints in both Beijing and Washington; this will crimp investment and business sentiment, and negative PPI inflation is an inauspicious omen for industrial profits, which will follow suit.
Figure 4. China
With weakness in world trade persisting and the Abe administration pressing ahead with the consumption tax hike, the risks of a deeper downturn in Japanese growth have risen materially.
Although tax-offsetting fiscal measures and likely policy easing by the BoJ could mitigate the downside to some extent, domestic policy response may struggle to prevent yen strength in the event of a significant sell-off in global risk assets.
From a policy perspective, the BoJ has a difficult choice between cutting rates and inflicting pain on banks and not cutting rates and risking an even deeper recession. They will likely choose the former.
But increasingly, as in the wider world, fiscal policy may have to play a bigger role in response to the unfolding downturn. Growth is now seen at 0.6 per cent in 2019 and at 0.2 per cent in 2020, both below consensus.
Figure 5. Japan
The outsized 0.9 per cent rise in GDP in Q2 was largely due to a surge in exports that will not be repeated – the boost was attributable to temporary factors in the energy sector.
Domestic demand actually shrank modestly as investment fell (the fourth decline in five quarters) and inventory levels were drawn down. With stock levels still high relative to output and business sentiment weaker, neither is set to pick up significantly.
Consumption remains well supported by a robust labour market for now, but domestic vulnerabilities associated with high debt levels and a softening house market have grown.
Stagnating global trade is hurting Canada, while any weakening in their US neighbour will also have a significant impact. The Bank of Canada is maintaining a neutral bias at present but has explicitly highlighted the growing downside risks.