Kuwait: DECEMBER 10, 2019
US GDP GROWTH REVISED UP IN Q3 AND PESSIMISM EASES
The second estimate of US GDP for 3Q19 saw growth revised up to an annualized 2.1% from 1.9% before. This left growth above the 2.0% recorded in Q2, helping to allay fears of a slowdown. Growth in consumer spending – which accounts for around 70% of the economy – was unrevised at a solid 2.9%, but private investment recorded a much smaller fall than previously estimated at -0.1% (-1.5% before) thanks to stockbuilding. ‘Nowcast’ estimates for Q4 have growth slowing to a range of 0.8-1.5%, which would leave growth for 2019 overall at 2.3% – still a decent performance in the context of the trade war with China, higher interest rates versus last year, fading fiscal stimulus and a mature economic cycle. While growth looks likely to slow to below 2% in 2020, fears of a recession have eased amid continued resilience of the labor market (jobs growth expected at 180,000 in November), some signs of recovery in the previously weak housing and manufacturing sectors, recent Fed rate cuts and reduced risks from overseas.
Meanwhile however, President Trump appears to be readopting a more aggressive stance on trade, perhaps emboldened by solid US economic performance, the stock market hitting record highs and a recent narrowing of the trade deficit. In early December he threatened fresh tariff measures on France ($2.4 billion in goods), Argentina and Brazil (steel and aluminum) and the EU (due to aircraft subsidies). Progress on a ‘phase one’ trade deal with China also appears to have stalled over disagreements on enforcement, tariff rollbacks and Chinese displeasure over US support for Hong Kong protesters, with the next round of US tariff hikes still scheduled for December 15. While an initial US-China deal could be welcomed by financial markets, it would be limited in scope, leave difficult issues such as intellectual property theft unresolved and could also result in a longer delay in securing a more substantial agreement to bring tariffs back down. Trump is unlikely to yield much ahead of the Presidential election in November, and warned that that could be too early even for a ‘phase one’ deal.
GERMANY AVOIDS RECESSION; ECB TO START POLICY REVIEW
In Europe, the German economy managed to grow by 0.1% q/q in 3Q19, narrowly avoiding a technical recession after contracting in Q2 and only slightly underperforming the Eurozone overall (0.2%). Solid growth in household spending (+0.4%) and government consumption (+0.8%) helped offset a decline in investment (-3.5%), though exports managed to rebound (+1.0%) following a large decline in Q2. Nevertheless, while the domestic economy continues to benefit from low unemployment (though retail sales did fall 1.9% m/m in October) and surveys of business sentiment including even manufacturing have picked up slightly of late, there are doubts over the strength of any upturn. The composite PMI remained in negative territory in November (49.4) and the German government is under pressure to loosen fiscal policy to support still-sluggish growth at home and elsewhere in Europe.
The ECB Governing Council will meet on December 12 and while policy should be left on hold, the bank may announce a strategic review of its monetary policy. The most fundamental aspect of the review could be a revisit of the bank’s ‘close to but below 2%’ inflation objective, which was set in 2003. The target has been consistently missed over the years with inflation averaging just 1.4% y/y since 2010 while core inflation averaged just 1.1% and never exceeded 1.7%. A new target could be set at a more precise 2% both to reduce ambiguity and to provide backing for the bank to keep policy looser for longer, though another option is lowering the target to make it easier to hit. There will also be debate around using monetary policy to address climate change, with climate activists (championed by Christine Lagarde, the ECB President) for example calling for the bank to eliminate bond holdings of corporates deemed to be environmental under performers.
The UK general election takes place on December 12 with the outcome pivotal to the Brexit issue for years ahead. Current PM Boris Johnson’s Conservative Party has maintained a significant though narrowing lead in the opinion polls as of early December, and if sustained would likely see him win a parliamentary majority, push his Brexit deal with the EU through the legislature and see the UK leave the EU at the end of January. Failure to win a majority however – still highly plausible not least due to tactical voting by the public across party lines reflecting Brexit preferences – would open the path to a second referendum sometime in 2020 and potentially reverse Brexit altogether. A Conservative majority is generally viewed as being good for short-term growth by lifting the uncertainty that has weighed on the economy and investment over the past three years. However, exit would merely leave the UK in a transition period due to expire at the end of 2020 after which the UK could still be forced to trade with the EU on WTO terms if no comprehensive trade deal has been agreed. This could see the pound back under pressure.
JAPANESE GROWTH STUTTERS IN Q3
Economic growth in Japan almost stalled in 3Q19 at an annualized 0.2%, down from 1.8% in 2Q19 as the continued weakness in the external sector weighed on the economy. Indeed, latest data showed Japanese exports falling for the 11th consecutive month in October by a worse-than-anticipated 9.2% y/y – its biggest fall in three years. Imports did not fare any better, falling by a staggering 14.8% reflecting continued weakness in domestic demand. The Japanese economy is likely to continue to struggle into 4Q19 as the effects of ongoing US-China trade tensions are compounded by the October sales tax hike, which is likely to put an additional damper on domestic consumption. With an economic outlook mired with downside risks, the Japanese government has unveiled a $120 billion pro-growth reform package.