Monthly Macro Outlook: The great stabilisation Monthly Macro Outlook: The great stabilisation Monthly Macro Outlook: The great stabilisation

Monthly Macro Outlook: The great stabilisation

Macro
Picture of Christopher Dembik
Christopher Dembik

Head of Macroeconomic Research

Summary:  The market narrative has shifted to economic stabilisation, but short-term risks to growth remain and we are still skeptical about the ability of stronger central bank liquidity to revive growth in 2020.


Over the past few months, the market narrative has shifted to economic stabilisation as central banks have massively stepped in in order to stimulate economic activity. Based on our calculations, more than 60% of central banks are easing globally, which is the highest level since the GFC. Many investors especially attribute the market’s rise to the Fed’s repo actions and the continued talks between China and the United States to reach a trade agreement. We even see more and more market participants talking about the potential for a rotation back to cyclicals and emerging market trades. However, in our view, short-term risks to growth remain and we would like to see a more clearly weakening USD before moving back to EM. We remain skeptical about the ability of higher central bank liquidity to revive growth in 2020 which means that fiscal push will be needed to stimulate the current business cycle.

China: wait-and-see position

In Asia, one of the most important news of the past months is that our leading indicator for the Chinese economy, credit impulse, is about to turn positive for the first time since Q4 2017. It is currently running at minus 0.4% of GDP. As China roughly represents 1/3 of global growth impulse, we could see the constructive global ripple effects of positive credit push in 2020. However, contrary to previous periods of slowdown (2008-2010, 2012-2014 and 2016), the global impact of positive China credit push is expected to be much more limited due to the following three reasons:

  • Credit impulse transmission is not working as efficiently as in the past because many domestic banks are saddled with bad debts;
  • Credit intensity has considerably increased over the past years. Before 2008, the country needed on average one unit of credit to create one unit of GDP. Since the GFC, 2½ units of credit are required to create one unit of GDP. It means that injecting more credit in the economy is not the miracle solution it used to be;
  • The disadvantages of credit push (more debt and heavy private sector debt service ratio) tend to surpass the advantages (lower rates and higher liquidity).

On the top of that, the process of financial deleveraging has not been completely abandoned by the authorities. If we use as a proxy for deleveraging the evolution of loans to non-banking financial institutions, we see a strong jump in loans on YoY basis in 2018, at the height of the trade war, followed by a return of the deleveraging process from mid-2019 (total loans to non-banking financial institutions are out at minus 8.4% YoY in October). Except for some marginal adjustments, like it has happened in November with the cut of interest rate on the one-year MLF loans, we expect that the PBoC will be in wait-and-see position until the end of the year and much of the first part of 2020.

28_CDK_1
28_CDK_2

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.

28_CDK-4

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.

28_CDK_5

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

 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.