Macroeconomic focus – December 2019

Stabilisation of activities

Q3 growth was confirmed at +0.9%, annualised, after +0.7% in Q2. The data suggest that private and public consumption is the primary positive contributor. A minor acceleration in residential investments was also noted. Non-residential investments are increasing slightly. Foreign trade slowed down activity, and inventory levels were discouraging for the fourth consecutive quarter.

This healthy consumption should continue, in light of good household income dynamics in a low unemployment environment (7.5% in October) with wage acceleration. Because stock adjustment phases are typically followed by a marked rebound in activities, one can expect this type of effect after several quarters of inventory decreases. However, the proportions seen during the recessions of 2009 or 2011-2012 have not yet been reached. Therefore, the rebuilding effect will undoubtedly be less significant, suggesting a more gradual recovery.

For the time being, the December PMI1 surveys are consistent with stabilisation, although they do not signal improvements. The eurozone composite PMI stabilised at 50.6, but this stability hides a downturn in the manufacturing PMI, from 46.9 to 45.9, and an improvement in the services PMI, from 51.9 to 52.4, and in the case of France, from 52.2 to 52.4, despite the strikes against pension reform. The decline in the manufacturing PMI in the eurozone is disappointing because the November increase had raised hopes that manufacturing activity had touched bottom. However, we must wait for the final PMIs to be published to watch for any positive impact on progress made on the Brexit and trade war fronts.

During her first press conference as the head of the ECB, Christine Lagarde continued Mario Draghi’s approach, at least in substance, maintaining all of the measures adopted in September and reaffirming that all instruments were ready to be adjusted. As far as the form, Christine Lagarde adopted a more direct tone than her predecessor. She also played the appeasement card vis à vis the Governing Council, indicating that she was neither in the camp of the “doves” nor of the “hawks” and that she was seeking consensus on her decisions to the greatest extent possible, suggesting a more collegial approach in the future.

 

 

 

 

 

 

 

 

 

PMI1 : PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).

 

 

 

Continued expansion

Q3 growth was revised to +2.1%, annualised, during the second GDP estimate, versus +1.9% according to the initial investment, entirely due to inventories. Published corporate profits show a slight decline for the quarter, after being corrected for inflation, but they have essentially been stable since 2016. This bodes well for continued expansion, since most recessions are preceded by a sharp downward trend.

Retail sales have been slowing down for several months, and the 0.1% increase in November (excluding volatile components) was disappointing. That said, it is possible that this number was penalised by the late date of Thanksgiving. Historically, this has tended to depress sales in November and stimulate sales in December, since a portion of post-Thanksgiving purchases are made in December. Therefore, we must wait for next month’s numbers to get a more accurate idea of American consumer dynamics in Q4.

In the meantime, consumer fundamentals remain strong. The jobs numbers were very dynamic in November, with 254,000 jobs created in the private sector, although these numbers were boosted by the return to work of strikers in the automobile sector. The unemployment rate returned to its low levels of September, to 3.5%, and the compaction in overall wage growth conceals a new acceleration for less qualified personnel.

The end of strikes in the automobile sector also stimulated manufacturing production. It rebounded by 1.1% in November, after -0.7% in October, thanks to a 12.4% increase in the production of automobiles and spare parts. The growth is more modest in the non-automobile sector, where manufacturing production increased by 0.3%.

The Markit PMI1 shows virtually no change in activity in the manufacturing sector in December, at 52.5 versus 52.6.

Although the manufacturing sector statistics are not yet improving significantly, the rebound is stronger in the real estate sector. Building permits for single family homes continued to improve in November, increasing by 0.8% after an increase of 3.4% in October, and the NAHB2 builder confidence index jumped from 71 to 76, its highest level since 1999.

Finally, there were no surprises at the Fed meeting. FOMC3 members maintained the interest rate target range of 1.50% – 1.75% and maintained their forecasts of no rate movement in 2020 and an increase in rates in 2021, followed by another in 2022.

 

 

 

 

 

 

 

 

PMI1 : PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).

Housing Market Index2 based on the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

The Federal Open Market Committee3 is a committee within the Fed charged with overseeing the nation’s open market operations (e.g., the buying and selling of United States Treasury securities).

 

 

 

Appeasement of trade tensions

After more than a year and a half of trade negotiations, the United States and China have agreed on the first phase of an agreement on 13 December.

For its part, the United States agreed not to increase the trade tariffs which were to take effect on 160 billion dollars of Chinese imports by 15% starting 15 December. The US also agreed to cut by half the trade tariffs put in place on 1 September on 120 billion dollars of Chinese products, to 7.5%. However, the United States maintained trade tariffs of 25% on 250 billion dollars of Chinese imports.

In exchange, China allegedly committed to increase its imports of American products by 200 billion dollars over the next two years in agriculture, food, energy, manufactured goods and services, an amount which has not yet been confirmed by the Chinese, however. According to the agreement, China commits to structural reforms in intellectual property, technology transfer, financial services, foreign trade and foreign exchange.

This partial trade agreement between China and the United States is very positive and reduces the risk of a new escalation which could compromise global expansion. However, there are several issues which limit its significance.

First, this agreement has not yet been signed. The US Department of Commerce representative is expecting it to be signed at the beginning of January 2020. Second, China’s ability to fulfil its import commitments is questionable. In fact, if the country intends to increase its imports of American products by 200 billion dollars in two years, that would bring its imports to 380 billion dollars in 2021, or more than twice 2018 imports, which could prove difficult.

Finally, this agreement ignores certain tricky topics, such as Chinese state subsidies, which should be addressed during negotiations on the second phase of the agreement. Therefore, although the risk of an escalation in trade tensions has clearly receded, it has not completely disappeared.

The easing of trade tensions comes at a good time for the Chinese economy, which was showing signs of weakness until recently. After a disappointing October, industrial production rebounded from +4.7% to +6.2%, investment increased from +3.4% to +5.2%, retail sales in volume stabilised at +5.0% over one year and PMI surveys improved significantly.

 

 

 

 

 

 

 

 

 

PMI1 : PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).

 

 

 

The opinion expressed above is dated 19 December 2019, and is liable to change.

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