Degroof Petercam AM: Macro Economic Update

• Although (geo)political uncertainty remains abundant, the narrative seems to have improved over the past weeks. There are signals that the US and China are on the verge of striking some sort of mini-trade deal (including a partial rollback of tariffs). Meanwhile, chances of an imminent hard Brexit have receded following the Brexit extension to early 2020 and current election polls. What’s more, the EU may escape US import taxes on cars.

• That said, any recovery in 2020 looks set to remain fairly modest by past standards. First, (geo)political tensions are unlikely to disappear going forward. A US-China deal may not happen. And next year’s US Presidential race may well add to uncertainty. Second, the automobile sector still faces difficulties on the back of modest demand, high inventories and a challenging transition towards electronic cars. Third, even though the latest figures out of China point to an improving economic environment, a strong rebound in activity seems unlikely. Finally, talk of more expansive Eurozone fiscal policy remains fairly cheap for now.

• The combination of weakening economic momentum, below target inflation and weakening price pressures has led central banks to become much more dovish throughout 2019. Monetary policy will remain loose in 2020 and both the Fed and the ECB are about to stress the importance of symmetry in their inflation framework. There has been more discussion on fiscal easing but those words look still fairly cheap for now.

US growth slips below 2% while inflation remains below target

• Confidence surveys in the US still point towards subpar growth (i.e. below the estimated potential growth rate of 2%) with no swift turnaround in sight, at least according to the latest PMI and ISM confidence indicators. Moreover, the positive impact of the Trump tax cuts (boosting growth in 2017-2018) is fading away and the uncertainty surrounding the upcoming 2020 Presidential election campaign in combination with ongoing geopolitical turmoil does not bode particularly well for business investment.

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