Growing concerns on economic growth

EcoPerspectives // 3 quarter 2019  
Growing concerns on economic growth  
Growth concerns for both advanced countries and emerging countries have picked up again on the back of a collection of new  
economic data but also  and perhaps more importantly  due to continued high uncertainty. The latter stems from escalating  
tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the  
US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve  
has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its  
message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.  
New records  
US Treasury yields vs ISM Manufacturing  
ISM Manufacturing (rhs)  
▪▪ 10-year yields, Treasuries (lhs)  
While the S&P500 reached new highs, US treasury yields dropped  
on the back of a revised outlook regarding the path of monetary  
policy and further declines in the term premium. Based on  
calculations by the Federal Reserve of New York, this risk premium,  
which investors are supposed to receive for taking on duration risk,  
has reached a record low of -90 basis points at the beginning of July.  
As shown in the charts, the decline of US bond yields has, quite  
understandably, mimicked the decline of the purchasing managers  
index (ISM) for the manufacturing sector. The coincidence of a  
record high stock market and a record low term premium raises a  
certain discomfort: declining bond yields reflect unease about the  
economic outlook, so one wonders how long the stock market can  
stay immune to these concerns. The drop in US yields has been  
accompanied by a considerable descent into negative territory of  
Bund yields as well as yields in other eurozone bond markets. Apart  
from the usual transatlantic correlation, the change in message  
coming from the ECB has played a key role in explaining such  
dynamics. Indeed, if we take at face value the ECB president’s  
speech in Sintra towards the end of June, a new cycle of easing is  
2012 2013 2014 2015 2016 2017 2018 2019 2020  
Source: Institute for Supply Management, Refinitiv  
S&P 500 vs US Treasury yields  
S&P 500 (lh.)  
▪▪▪ 10-year yields, Treasuries (rhs)  
Growth concerns on the rise  
In the US, while a sigh of relief followed the publication of first  
quarter GDP data, concerns over growth have since picked up  
again. The picture is mixed. The pace of job creation remains, on  
the whole, strong but investment activity is weakening. Market  
based signals (the inversion of certain parts of the yield curve) have  
raised recession fears, while increasing anecdotal evidence point to  
the detrimental impact of tariff increases on businesses and the  
2 500  
agricultural sector. Although the US entered its 121 month of  
Source: Refinitiv  
economic expansion, it appears that euphoria has largely given way  
to caution. In the Eurozone, the manufacturing sector, in particular  
in Germany, remains under pressure, although services are holding  
up well.  
The decision by the group of OPEC+ countries to renew the  
production quotas adopted at year-end 2018 will make the recovery  
very gradual.  
In Emerging Countries (ECs), growth slowdown is still on-going and  
may worsen in the course of the year. The trade war between China  
and the US has made the downturn in external trades within Asia  
worse. Despite official announcements regarding the negotiation  
process, external demand will remain a major impediment to growth  
for ECs, not only in Asia but also in Latam and MENA. Metal prices  
and oil prices are trending downward since respectively mi-2018  
and Q4 2018 and agricultural prices have stagnated since mid-2015.  
The painful of a number of commodity exporters is not over.  
Except for Central European countries, domestic demand will not  
compensate for the weakness of external demand notably for  
almost all the major ECs (China, India, Brazil, Russia, Mexico,  
Turkey, South Africa, GCC countries as a whole). Firstly, monetary  
policies will remain cautious. Secondly, there is a fiscal room of  
manoeuvre only in China, Russia, Turkey and GCC but at the  
expense of debt stability (Saudi Arabia) or financial stability (Turkey).  
In any case, the fiscal stimulus will be used with great moderation.  
EcoPerspectives // 3 quarter 2019  
Tipping point  
Against this background of increased growth concerns, the key  
question for the coming months remains whether a tipping point will  
be reached. Fundamentals (labour market, income growth,  
corporate profits growth, interest rates) are, on the whole, still  
satisfactory, but a protracted period of uncertainty could weaken the  
influence of these fundamentals on growth. This in turn could weigh  
on confidence and market behaviour and trigger a negative  
feedback loop. A reduction in uncertainty would obviously provide a  
boost of confidence and create an uptick in growth. Trade  
negotiators should keep this in mind when they meet.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
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