Degroof Petercam AM: Macro Economic Update

• Global economic confidence still points to fairly sluggish activity. The manufacturing sector remains in the doldrums and global trade volumes are contracting (see graph below). The good news, however, is that activity in the services sector continues to do well. Moreover, there’s evidence that the industrial downturn will soon reach a trough. Indeed, confidence indicators suggest the global industry is about to turn the corner (see graph below).

• All in all, however, a strong synchronized global economic upturn (similar to what we’ve seen in 2016-18) looks unlikely. First, geopolitical uncertainty will continue to weigh on firms’ investment plans. 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. Fourth, talk of more expansive Eurozone fiscal policy remains fairly cheap for now. And fifth, despite ultra-low interest rates, bank standards for lending have tightened.

• Rising US-Iran tensions keep the Middle East in a permanent state of alarm. The latest developments point to dangerous situation but a major escalation is not our base case scenario. The US and China are about to sign a mini-deal (including a partial rollback of tariffs) in January but underlying tensions will likely remain high. Meanwhile, chances of an imminent hard Brexit have gone down following the Brexit extension to early 2020 and the December election results. However, uncertainty with regard to the future EU-UK relationship will linger on.

• 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 looks set to remain loose in 2020 on the back of both modest economic growth and underlying inflation expectations. That said, headline inflation will increase from current levels as earlier base effects fade and oil prices move higher as a result of the US-Iran conflict. More strategically, both the Fed and the ECB are about to stress the importance of symmetry in their inflation framework.

US consumer trumps weak industry

• 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. 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. The manufacturing sector is still struggling (ISM at 47.2 in December). What’s more, more forward leading indicators (such as the Conference Board’s CEO confidence and Ifo economic expectations) point to a sustained growth deceleration.

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