Kuwait: February 10, 2020
US GROWTH STEADY IN Q4; FED LEAVES RATES ON HOLD
Economic growth in the US stood at an annualized 2.1% in 4Q19, unchanged from Q3 and in line with expectations. Consumer spending moderated to 1.8% from Q3’s very strong 3.1%, and a slowdown in inventory growth also weighed on activity. These negative factors were offset by stronger government spending (2.7%) and especially a sharp drop in imports (-8.7%) – the latter perhaps due to the unwinding of strong imports in Q3 when firms had looked to beat September’s tariff hikes on Chinese goods. Growth overall in 2019 slowed to 2.3% from 2.9% in 2018 and was the softest since 2016.
Latest high-frequency data suggests that activity may now be picking up, with in particular the housing market recovering (price increases accelerating after a two-year slowdown), the ISM manufacturing index turning positive (50.9) in January for the first time since July and job growth maintaining a solid pace of 145,000 in December. This has eased immediate concerns over a downturn, but uncertainty over trade, the coronavirus and indeed the mature stage of the economic cycle is set to limit the potency of any upswing.
In a relatively low-key January meeting, the Federal Reserve kept policy rates at their current 1.50-1.75% range, citing the strong labor market, moderate consumer spending growth but core inflation – at 1.6% y/y on the PCE measure in December –below the 2% target. Futures markets are pricing in a more than 80% chance of at least one 25 bps cut by year-end. Fed chairman Jay Powell said that the bank could cease pumping extra liquidity into the market – currently at a rate of $60 billion per month – sometime in Q2. The move was originally portrayed as a technical measure to help keep policy interest rates within their target range, and has pushed the Fed’s balance sheet back up to nearly $4.2 trillion from $3.8 trillion last September. But some analysts claim it has been a factor in the strong stock market rally and that the Fed will at least have to manage the phasing out of injections carefully to avoid market disruption.
BOJ UPGRADES GROWTH OUTLOOK
The Bank of Japan kept monetary policy on hold last month, maintaining its short-term interest rate at -0.1% and its pledge to keep 10-year government bond yields at around 0%. The bank also upgraded its growth outlook for the fiscal year starting in April from 0.7% to 0.9% on the back of planned fiscal stimulus measures amounting to $121 billion. Both headline (0.8%) and core (0.9%) inflation rates remain well below the bank’s elusive inflation target of 2%, leaving it ample room to ease monetary policy to support the economy if need be. Meanwhile, both exports and imports continued to fall in December, with exports declining 6.3% y/y (its 12th consecutive month of decline) and imports retreating by 4.9% (albeit an improvement from a 16% drop in November). While the US-China trade deal should offer global trade growth and Japanese exports some support going forward, the economic effects of the rapid spread of the Coronavirus, which has led to the shut down of various manufacturing plants, may lead to supply-chain disruptions that ultimately hamper global trade growth.
CHINESE ECONOMY HIT BY VIRUS OUTBREAK
The death toll in China from the Coronavirus outbreak topped 490 by early February with more than 24,000 confirmed cases, much higher than during the 2002-2003 SARS outbreak. This has and will continue to have negative ramifications on the economy, as both local and international authorities take further urgent measures to limit the spread of the virus. The government extended the Lunar New Year holiday and a number of international firms including Starbucks, Apple and Hyundai have halted operations indefinitely.
This will weigh on economic activity in 1Q20, coming soon after data showing that growth stabilized at 6.0% y/y in 4Q19, unchanged from the previous quarter. For 2019 as a whole however, growth slowed to an almost three-decade low of 6.1% in 2019 from 6.6% in 2018, though still within the government’s target of 6-6.5%. The slowdown was led by a weaker external sector and as investment and consumer spending came in softer. The official PMI for January showed manufacturing activity stagnating at 50.0 versus 50.2 in December, but it may not yet be reflecting the full impact of the virus outbreak. Meanwhile, in a bid to provide support to the economy, China’s financial regulators announced $242 billion in liquidity injections and an ease in lending restrictions to help business. The authorities are also reportedly seeking some flexibility on pledges made under the ‘phase one’ trade deal with the US. The stock market fell 7.7% – its largest daily drop in years – the day markets reopened after the extended holiday and the yuan fell back towards RMB7/UD$1.