Japanese GDP growth was stronger than expected in early 2019. Despite the current troubles in the export sector, for the moment domestic demand - both public and private - is picking up the slack. In the short term, two sources of concern loom over Japan’s macroeconomic scenario. First, Japan is highly exposed to the slowdown in both the Chinese economy and international trade. Second, the VAT increase in October will curb consumption during the year-end period and possibly in 2020 as well. Faced with these internal and external uncertainties, Japan will maintain accommodative monetary and fiscal policies, the effectiveness of which remains to be seen.
Weak data and business cycle indicators suggest that German economy would be in a mild technical recession. The weakness is mainly in the manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.
The French economy continues to show proof of resilience judging from the stability of its GDP growth?–?at an annualised rate of just over 1%?–?and the relatively strong showings of confidence surveys and of the labour market. Although prospects are still favourable, the horizon has darkened in recent months with Germany showing signs of recession, the escalation of trade tensions and lingering uncertainty over Brexit. We expect business investment and exports to decelerate sharply under the weight of a more uncertain, less buoyant external environment. Yet the slowdown is likely to be offset by the expected rebound in household consumption, supported by major fiscal measures to boost household purchasing power.
The new Government has approved the update of the economic and financial document, planning to raise the deficit to 2.2% of GDP in 2020. The 2020 Budget Law is estimated to amount to EUR 30 bn. Some measures contained in the budget, such as the cut of the fiscal wedge, are expected to sustain the economy with a positive effect on growth, despite an increasing uncertainty. In Q2, GDP increased by 0.1 y/y, as stocks negatively contributed to the overall growth, while exports continued to rise. Domestic demand suffered from the mixed evolution of labour market and the further delay of the full recovery of the housing market.
Spanish voters will be called back to the ballot box on 10 November, but there is no certainty that the election results will pull the country out of its current impasse. The political landscape is still too fragmented to produce a lasting coalition. The line to follow in the face of Catalan independentism only exacerbates the divisions and helps justify the lack of co-operation. Meanwhile, growth has slowed somewhat more sharply than originally expected, although it is still holding around 2%, a performance that would be welcomed by many of the other big European economies. The elaboration and adoption of the 2020 budget bill will have to wait until a new government is formed.
Belgian GDP growth is expected to come down from last year’s 1.4% to a mere 1% in 2019 and 0.7% in 2020. This reflects a further slowdown in international trade, which is only partially offset by resilient domestic demand. Despite a slowdown in job creation, a pickup in disposable income spurs on private consumption well into 2020. Public finance remains a key risk-factor with government debt in excess of 100% of GDP. Further fiscal slippage seems almost inevitable with government formation talks not yet near a conclusion.
After its electoral success in late September, the conservative party (ÖVP) is expected to form a new government. To obtain a majority, the party could turn again to the FPÖ (far right). In that case, policies should remain largely unchanged and focus on fiscal consolidation and the reduction of the tax burden. The next government will face a less favourable economic environment. GDP growth could decelerate to around 1.2% in 2020. Nevertheless, public finances have improved considerably, giving the government sufficient leeway to fight a recession, if necessary.
The economic slowdown has been very gradual so far, but it is expected to progressively spread during the second half of 2019 and in 2020. With unemployment at the lowest rate since 2002, households remain confident and have just renewed their confidence in Prime Minister Costa’s administration. After winning the legislative elections of 6 October with more than 36% of the vote, the Socialist party is preparing to form a new government with the support of the other left-wing parties.
As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK is heading? Probably not the Prime Minister itself, Boris Johnson, who lost his majority in the House of Commons in an attempt to suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general election.
The Norwegian economy is expected to report robust GDP growth through the end of 2019, thanks to dynamic oil sector investments in Norway and abroad. Growth is expected to slow thereafter in a less favourable international environment. Moreover, investment in the Norwegian oil sector is expected to ease up in 2020. However household consumption should continue to grow at a relatively sustained pace, buoyed by wage acceleration. The central bank of Norway will not opt for any further rate increases in the quarters ahead. Inflation should hold near the central bank’s target of 2%, while external risks are on the rise.
Between the end of March 2018 and the end of August 2019, the yuan lost nearly 13% against the dollar. With each new increase in US tariffs (announced or effective), the Chinese authorities have responded by letting the yuan depreciate to offset partially the impact on export corporates. In September, despite the introduction of new tariffs, the yuan levelled off against the dollar, because Beijing and Washington had agreed to restart trade talks. In the short term, exchange rate policy is likely to be used moderately to stimulate economic growth, especially due to the risk of a vicious circle as the anticipation of currency depreciation fuels new capital outflows triggered by the yuan’s decline. Yet this risk is limited, however, by ongoing controls on resident capital outflows
The manufacturing purchasing managers’ index of the Institute for Supply Management (ISM) has continued its decline in September, reaching 47.8%. The non-manufacturing ISM has registered a big drop of 3.8 percentage points and is now at 52.6% — a very low print for a non-recessionary period. Against this background, bond yields have declined significantly reflecting increasing worries about recession risk, rising expectations about additional Fed easing and a greater flight to safe havens. The labour market data for September however brought some relief. Nevertheless, we expect the Fed to continue to cut rates.
Although August industrial production and retail sales beat expectations, key data with respect to September have sent conflicting signals. Both the manufacturing and non-manufacturing ISM came in below expectations, creating a lot of nervousness in the run-up to the release of the all-important labour market data. They brought relief with 136.000 jobs having been added in September (versus a Bloomberg consensus of 145.000) and, in particular, an unemployment rate of 3.5%, which is well below the consensus of 3.7%...
Private consumption has played a greater role in the Chinese economy in recent years, but this growth engine remains fragile. At a time when the export sector is hurt by US protectionist measures and weak global demand, China is seeking other solid sources of growth. Yet private consumption growth is slowing and is likely to be disappointing in the short and medium terms. A catching-up dynamic should continue, supported by urbanization, an ageing population and action of the government, which strives to reduce income inequality, improve housing affordability and further strengthen the social protection system. owever, these structural changes will take time
After recording a 1.2% y/y growth in Q1, real Mexican GDP contracted by 0.7% y/y in Q2. The lack of dynamism of US activity, weighing on the Mexican export sector and the significant slowdown in both public and private investments, due to deteriorating business and investment sentiments, are the two key factors explaining the slowdown. For the same reasons, the risks remain tilted to the downside for the coming quarters.
Market expectations were elevated but the Governing Council did not disappoint. The comprehensive nature of the package, with the introduction of state-dependent forward guidance, take away the need to envisage additional measures in the foreseeable future. ECB watching has been narrowed to monitoring the gap between inflation and the ECB target. Given certain negative side effects of the current monetary mix, which are acknowledged by the Governing Council, fiscal policy, where leeway is available, is now requested to step up to the plate, so as to foster growth and speed up convergence of inflation to target. The policy baton has been passed.
Business cycle indicators mostly disappointed during the summer months and ended up below the already subdued expectations. In July, both industrial production and orders fell sharply. This could be partly attributed to the early start of the summer holidays. In that case, an opposite effect can be expected in August. More worrying was the more-than-expected decline of the IFO climate index in August, as business conditions in trade and services fell sharply. It is a sign that the deterioration of the business climate is not anymore confined to only manufacturing, something which has been emphasized by the Bundesbank. But this was contradicted in early September by the PMI composite. The indicator was actually stronger than expected, as services growth remained solid.
Business surveys in the US paint a diverging picture: manufacturing is worsening significantly but services have picked up nicely. Taking a broader perspective, evidence is building of a slowing economy. Less dynamic growth can be observed in engines of growth of the world economy: China and India, although reasons differ. In Europe, Germany is probably already in a technical recession whereas France is resilient. Central banks are back in easing mode but the effectiveness will be hampered by elevated uncertainty, despite the announcement of a new round of trade negotiations between the US and China.
A general election will be held on 29 September, as the coalition between ÖVP and FPÖ fell apart in May. The ÖVP is likely to increase its seats in parliament, but probably has to turn to the FPÖ again to obtain a majority. The policy is unlikely to change and remains focused on budget consolidation and the reduction of the tax burden. The next government will be confronted with a less supportive economic environment. GDP growth is expected to slow to around 1.2% in 2020.
Our pulse indicators continue to send a positive signal: stability of the INSEE business and consumer confidence surveys in August, even a slight improvement in the composite PMI; a more important than expected fall in Q2 unemployment rate (-0.2 points, at 8.5%); a small but solid rebound in July consumer spending on goods (+0.4% m/m); a slight upward revision of the second estimate of Q2 GDP growth (+0.1 point, at 0.3% q/q), thus running at the same rate as in Q1.
The government’s 2019 budget growth target of 3.1% is clearly out of reach. Indeed, real GDP growth stood at only 1.1% during the first six months of the year. Except tourism and to a lesser extent agriculture, most sectors have stalled, or even contracted (industry). Headwinds will remain powerful in the coming months, starting with the subdued demand from European countries. Despite signs of inflation stabilization, the monetary environment will also remain restrictive amid strong pressure on external accounts. Above all, uncertainties linked to presidential and parliamentary elections scheduled in September-October will continue to weigh on the business climate and thus investment. The economic recovery expected in 2020 will greatly rely on a steadfast implementation of reforms
According to the recently released Beige Book of the Federal Reserve, the United States should continue to see modest growth. Most indicators are above their long-term average, the manufacturing ISM and industrial production being exceptions.
Based on advance indicators for Q2 2019, Singapore’s GDP barely increased in y/y terms (+0.1%) and declined by 3.4% q/q sa (down from +1.1% and 3.8%, respectively, in Q1). GDP contraction is due to the weak performance of the manufacturing sector, which is hard hit by the effects of US-China trade tensions and weakening global tech cycle.
The sub-Saharan Africa’s largest economy is having hard time to recover. External rebalancing has showed some progress. But imports remain well below pre-crisis levels. In addition, the rebuilding of FX reserves is being accompanied by increased financial vulnerability, which puts pressure on monetary policy as the authorities give the priority to exchange rate stability. Weak public finances are an additional constraint. In the short term, and despite its strong potential, the economy is expected to grow more slowly than the population. As well as improving macroeconomic stability, the authorities will have to address the deep-seated factors that are holding back the economy as a whole.
Since the mid-1990s the Italian economy has seen a significant economic uncoupling, which has worsened since the 2008 financial crisis. Its difficulties include a level of productivity that is one of the lowest in the advanced economies, a demographic decline and a relatively inefficient labour market, which still excludes too many young people. Structural reforms were introduced under the government of Mario Monti, from 2011 on, bringing a recovery in fiscal and trade accounts, but it remains to be seen what the current government will now do.