We are delighted introduce you to The Lens, the newest addition to FrontierView’s market-leading insights. The Lens is a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. Each week, we will provide our views on the most critical economic and geopolitical trends through our signature scenarios framework, key forecasts and major revisions, and the “so what, now what?” implications that will enable you and your teams to interpret these fast-moving events to power your decision making.
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In this week’s edition, our analysts provide our view on the global manufacturing slowdown, China’s new fiscal stimulus, Brexit and more.
The Lens: March 21, 2019
Global manufacturing has slipped toward contraction
- After a big upsurge in global demand growth that took hold in mid-2016 and expanded across 2017, global manufacturing has slipped toward contraction.
- China and Germany’s purchasing managers indices peaked in early 2018 and have fallen consistently since then, leading to weaker economic growth. This had led to several rounds of policy stimulus in China and additional monetary stimulus from the European Central Bank.
- US manufacturing has held up much better due to its relative isolation from exports to drive growth. Domestic demand in the US remains solid, and the Federal Reserve has communicated that it will keep monetary policy sufficiently loose to maintain a positive growth environment (see below).
Our view: Demand growth in 2018 disappointed to the downside, which led to big downward revisions to countries that rely heavily on exports. But weaker growth has spooked economic policymakers enough to prompt a big shift in the global policy outlook, with policy easing the norm across major economies. This should arrest the slowdown in global manufacturing and trade flows, though concerns remain that policymakers in China and the EU may not have the right policy blend in place.
Business implications: Demand forecasts for 2019 need to be revisited across countries and industry verticals. There have been significant changes in each market since strategic planning sessions held in mid-2018, when forecasts had not yet priced in a global slowdown for H2 2018, much less recent policy stimulus that will lead to further changes to demand forecasts.
Antonio Martinez and Ryan Connelly
Cautious US Federal Reserve signals no hikes for 2019
- A majority of Federal Reserve officials signaled that they expected no interest rate hikes in 2019.
- This is a substantially lower interest rate outlook than in December 2018, when only two Fed officials expected that no hikes would take place in 2019.
- This is a far more dovish interest rate outlook than expected by most economists. Emerging markets currencies, US Treasuries, and oil appreciated on the news.
Our view: The Fed signaling a pause is consistent with current levels of core inflation, which remain below its target rate. Weakness in China and Europe creates a spillover risk that could lead to further US weakness. The Federal Reserve revised down its US GDP outlook for 2019 to 2.1%, which is identical to our own internal forecast.
Business implications: There are three key implications for the 2019 global business outlook from the dovish stance from the Federal Reserve. First, this should firmly dispel concerns that a 2019 US recession will be triggered by a Federal Reserve policy mistake. Second, US consumers will continue to increase demand in 2019, providing positive support for US imports. Third, the lower path of US interest rates will lead to less pressure on emerging markets currencies, and allow for lower interest rates in emerging markets where central banks were fighting capital outflow. All in all, the dovish Federal Reserve is a very good sign for the global economy in 2019.
China’s new fiscal stimulus won’t stop internal slowdown
- Earlier in March, China announced a set of new fiscal stimulus measures designed to increase growth by increasing domestic demand from consumers and small and medium enterprises.
- Changes to consumer taxation should offer mild support, with most of the changes designed to benefit lower income households (annual income of RMB 60,000, or approx. US$ 8,800).
- The government also took limited steps to support private businesses, especially firms with less than 3 million RMB in annual revenue.
Our view: The Chinese government has not reversed its debt deleveraging campaign, and it is not expected to. Beijing has held back from implementing the sorts of large, government-directed credit expansion that it relied on in the past, before addressing the debt overhang became a central policy goal. The lack of a big, credit-financed investment push this time around means that the Chinese stimulus is unlikely to significantly stimulate external demand, painting a still-weak picture for the import outlook for 2019.
Business implications: Firms with operations or sales in China need to evaluate the impact of specific policy measures on their businesses. But the broader implications for global demand are that a China stimulus will not fully offset the internal slowdown. Expect weak import demand for higher-income households, as confidence continues to weigh on demand. Commodity demand for base metals, copper, and oil will all be supported by the stimulus effect, but prices are expected to remain around current levels due to a combination of weaker global demand amid a relatively tight supply environment, with risks tilted to the downside for commodity prices.
FrontierView clients: See the Singapore Executive Breakfast Presentation for the most recent updates to our China outlook
Mexico’s slowdown tempers business expectations
- The Mexico growth outlook has weakened substantially in the past few months, corresponding with the inauguration of the new leftist president Andrés Manuel López Obrador, known as AMLO.
- Weaker-than-expected economic growth began in H2 2018. This was not caused by a decline in exports, but weaker domestic activity. Industrial production and investment are falling, and this is only getting worse amid high rates of capital outflow.
- AMLO’s revisionist policies, including the cancellation of the already-under-construction international airport and a failed attempt to curb gasoline theft that led to gasoline shortages across the country, have created investment and demand uncertainty.
- Consumer confidence has risen since AMLO’s electoral victory, but real wages and retail sales are slipping..
“Mexico’s risk has shifted from the possibility of the NAFTA termination to domestic uncertainty driven by AMLO’s policy platform” –Alejandro Valerio, Senior Mexico Analyst
Our view: AMLO’s first year will be characterized by further policy uncertainty. The combination of domestic issues amid a slowing global growth outlook is problematic. The bias to the growth outlook is to the downside, especially if consumer spending slips below our growth forecast.
Business implications: Policy uncertainty will slow CAPEX and investment flows, increasing urgency for multinationals to temper their top-line and bottom-line expectations because the economy will grow weaker than expected in 2019.
FrontierView clients: See our Mexico City Executive Breakfast presentation for an updated outlook
Brexit: PM May to seek Brexit extension until June 30th
- The UK will seek an extension to Article 50 from the EU, pushing back the Brexit clock from March 29 until June 30.
- The EU may not grant the full extension: Initial reporting suggests that the EU will only allow a shorter extension until May 23, when EU parliamentary elections are held, or a longer extension requiring the UK to participate in EU parliamentary elections.
- Pro-Brexit ministers will not support any delay that forces the UK to hold EU parliamentary elections, making a short extension the only possibility at this time.
- PM Theresa May wants the House of Commons to vote again on her Brexit plan, as she has worked to get reluctant members of Parliament on her side. But the speaker of the house refused to allow the vote.
Our view: The only clear way to avoid a “No Deal” Brexit is for the House of Commons to approve May’s deal. This remains the most likely outcome. May’s plan still represents the best compromise that actually leads to Brexit, which pleases Brexiteers, while also avoiding the Hard Brexit and its myriad problems (in particular related to the Irish border, as well as severe economic and social disruptions).
Business implications: This week’s political gridlock serves as a reminder of the lingering potential for a No Deal Brexit in light of the legalistic complexities inherent to the Brexit process. While a No-Deal Brexit is still highly unlikely, businesses need to keep their contingency plans in place until there is more certainty around the nature of the extension. Until then, the uncertainty will continue to weigh on domestic demand and the value of the British pound.
FrontierView clients: See our Brexit Live View Dashboard for further insights