Towards a slight growth pick-up

EcoPerspectives // 1 quarter 2020  
Towards a slight growth pick-up  
In recent months, the global manufacturing cycle has been bottoming out whereas in services a slight uptick has been noted. In  
addition, two major sources of uncertainty have seen a positive development: the US and China signed a trade deal and the UK and  
the European Union can at last start negotiations about their future relationship. Very accommodative central bank policy has  
contributed to buoyant market sentiment. The combination of these three factors - stabilisation of business sentiment, decline in  
uncertainty, supportive financial environment - implies conditions are met to see some uptick in growth. Nevertheless, caution  
prevails in this assessment, if only because later on this year, uncertainty may very well increase again.  
Stabilisation of survey data  
OECD composite leading indicator  
United States Japan  
As illustrated in the chart, with the exception of Japan, the pace of  
decline of the OECD composite leading indicator is slowing which  
would suggest that in due course, some growth pick-up should  
follow. Recent business survey data have also brought some hope.  
Manufacturing purchasing manager indices have stabilised globally.  
Some economies have seen a slight increase from the lows seen in  
the summer and autumn of 2019 (eurozone, Germany, China)  
although the level remains low. Services PMIs are doing a bit better  
and the much dreaded spillover coming from last year’s  
manufacturing slowdown has been avoided to a large degree.  
Importantly, export order assessments have also improved although  
the levels remain very low.  
Asia Major Five*  
*China, India, Indonesia, Japan, Korea  
Easy financial and monetary conditions  
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
The Federal Reserve and the ECB have accompanied last year’s  
policy easing decisions with an (implicit) message that official rates  
will stay very low level for quite some time. Although the Fed’s  
policy is data-dependent, the bar for considering a rate hike seems  
to be high and the necessary acceleration of inflation to tip the  
balance is very unlikely any time soon. Christine Lagarde’s  
statement that an inflation rate of 1.6% as projected by the ECB for  
Source: OECD, BNP Paribas  
In addition, markets have reacted very calmly to the rising tensions  
between Iran and the US at the start of the year. They consider the  
risk of a major escalation as being very small. However, it can’t be  
excluded that later on this year, uncertainty makes a comeback.  
Concerning the UK-EU negotiations, not enough time is left to strike  
a comprehensive deal by year-end. This, in combination with recent  
statements by the UK Chancellor of the Exchequer about his  
country’s intentions to set its own rules and regulations suggest that  
negotiations will be tough. With respect to the US-China trade deal,  
it offers, upon closer inspection, little reason for cheer. It is an  
example of managed bilateral trade and thus creates trade diversion  
to the detriment of third countries, it maintains the bulk of the  
significant increase in tariffs introduced on both sides since the start  
of 2018 and, most importantly, it is only a phase 1 deal. Phase 2  
negotiations  expected to start after the US presidential election in  
November 2020 - may very well be even tougher whereby the  
reciprocal threats of trade sanctions would end up dominating  
headlines again.  
022 would not correspond to the aim that the central bank pursues,  
suggests that no rate hike is to be expected before the end of 2022,  
unless the ECB staff would have underestimated the inflation  
dynamics. This in turn would require a significantly faster growth of  
activity and wages, which doesn’t look to be on the cards. This very  
accommodative monetary policy environment continues to stimulate  
the risk appetite of investors, all the more so given the decline in  
uncertainty, as explained below. The ensuing rally in equities has  
found its mirror image in an increase in government bond yields,  
reflecting the view that investors consider the economic outlook to  
have become somewhat less risky. All in all, financial and monetary  
conditions have eased, which, all else being the same, should end  
up supporting growth.  
Uncertainty has declined, for now  
Two issues which have been major sources of protracted  
uncertainty have seen a positive development as of late. In the UK,  
the huge victory of Boris Johnson in the December general election  
paves the way for a negotiation with the EU about the future  
relationship, easing fears of a no-deal hard Brexit. The signing of a  
trade deal between the US and China has avoided a new  
intensification of the trade war.  
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.
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