Monthly Macro Outlook: The great stabilisation

Rest of the world: All eyes on Germany

In Europe, economic weakness persists. We see the euro area growth close to zero in Q4 2019 on a Q/Q basis. What worries us the most is the growing divergence between countries that are resilient to ongoing headwinds (France, Spain and Portugal) and countries that are facing both cyclical and structural issues (notably Germany). Over the past few days, there have been signs that the German economy may have bottomed out. The country avoided falling into technical recession in Q3 due to a rebound in external demand from the United Kingdom and Turkey, and the latest consumer confidence survey tends to point out that willingness to spend is still high.

However, we think that the worst has yet to come for Germany. On the cyclical side, the country is still negatively impacted by China’s slowdown, which is its most important trade partner with a total trade volume of around 200 billion euros. The latest data show that Germany export growth to China is still contracting, at minus 8.2% YoY in October and, based on preliminary data, it could get worse in coming month and lead to a new fall in Germany’s manufacturing PMI in December or January.

On the structural side, we notice a deterioration of the quality of GDP, as government spending offsets investment and domestic demand, which underlines lower confidence from the business sector. We also notice that Germany has still not addressed the issue of misallocation of R&D investment. While Germany is well-ranked in terms of R&D investment, 50% of this goes into the struggling automotive sector, resulting in a chronic underinvestment in the ICT sector. It largely explains why Germany is lagging behind Asia/China in new innovative industries. It would be exaggerated to state that the country is the new sick man of Europe, but it is obvious that Europe’s traditional locomotive is down and will not be able to catch up with past economic performances anytime soon.

In the United States, we don’t think there is a strong case for recession in 2020. Most US leading indicators are pointing out to growth deceleration and are not in recessionary territory yet. The most commented leading indicator, the Leading Economic Index (LEI) published by the Conference Board, decelerated to a growth rate of 0% in October. It is bright clear that the US industrial cycle is in downturn mode. US manufacturing, known as an efficient coincident indicator of the industrial earnings cycle, is in contraction at 48.3 in October versus an annual peak at 56.6 in past January. The recent slight rebound (from 47.8 to 48.3) should not be overstated as trade war impact and China’s low growth remain.

However, economic activity should keep being supported by personal consumption, as was the case in Q1 and Q2 of this year. Personal consumption has been the most important contributor to GDP growth since the beginning of the year and the trend should continue in coming quarters. Government spending, which has been low, may increase if the slowdown is deeper than anticipated. The only worrying spot is related to fixed investment which has been a drag on GDP growth since January and is not expected to rebound anytime soon due to high CEO pessimism. Overall, our view for the US economy is neither bad nor good. We forecast that US growth will move towards 1.6% next year, that inflation will be contained, and that unemployment will stay below 4%.

Calendar of December 2019

Dec 5: OPEP meeting and Aramco stock pricing

Dec 6: OPEP+ meeting and US NFP

Dec 9: Rumored to be the day of the announcement of Saudi Arabia’s budget

Dec 11: FOMC meeting and first day of trading for Aramco stocks

Dec 12: SNB/ECB meetings and UK general election

Dec 19: BoE meeting