Mounting headwinds will weigh on global growth further down the road...

REAL SECTOR
Mounting headwinds will weigh on global growth further down the road Global economic growth appears to be losing some steam in Q3 following Q2’s strong result. A strengthening U.S. dollar and higher borrowing costs are unnerving financial markets in developing economies, while rising trade protectionism is starting to weigh on business sentiment. Moreover, economic dynamics are softening in China and the Eurozone. On the flip side, the U.S. economy continues to fire on all cylinders, while Japan is holding up relatively well due to strong investment. A GDP growth estimate for the global economy projects year-on-year growth at 3.3% for Q3. While the print was a notch below the result from the previous period, it matched last month’s forecast. The escalation in the ongoing trade war between China and the United States topped the headlines in recent weeks. On 24 September, the U.S. enforced a 10% tariff on USD 200 billon of Chinese products, which will rise to 25% on 1 January. President Trump also warned that the U.S. will pursue additional levies on USD 267 billion of Chinese imports if Beijing retaliates against “our farmers, ranchers and industrial workers”. Nevertheless, China immediately fired back with tariffs of between 5% and 10% on USD 60 billion of U.S. goods imported into China. The direct impact of these tariffs is expected to be rather limited given that they only represent around 1.5% of global trade, while some of the production could be quickly diverted to other countries, especially in Asia. However, a worsening trade environment could have an impact on business sentiment, deterring global investment and affecting supply chains. Moreover, it could also exacerbate economic imbalances in China as authorities once again rely on investment and lending to rekindle economic growth. The recent selloff in emerging markets has stressed the vulnerability of some countries to sudden changes in capital outflows. Argentina and Turkey were particularly affected by the financial turmoil, with both countries nearing full-blown exchangerate crises, and sharp currency depreciations occurred across most developing economies ranging from Brazil to India and South Africa. That said, the consequences are expected to greatly diverge, especially hitting those with large current account deficits and/or high exposure to external borrowing.

Finally, in Europe, Brexit negotiations between the European Union and the United Kingdom remain at an impasse after the Global outlook stable 2.4 2.8 3.2 3.6 Q1 15 Q1 16 Q1 17 Q1 18 Q1 19 2.9 3.1 3.3 3.5 May Aug Nov Feb May Aug 2018 2019 World Economic Growth Change in GDP forecasts Note: GDP, real annual variation in %, Q1 2015 - Q4 2019. Note: GDP, evolution of 2018 and 2019 forecasts during the last 18 months. FOCUSECONOMICS Summary FocusEconomics Consensus Forecast | 3 October 2018 European Union rejected the UK’s Chequers plan at the 20 September meeting in Salzburg. The president of the European Council, Donald Tusk, stated that Theresa May’s proposal “risks undermining the single market”. The UK prime minister now has until 18 October to present an alternative plan and the possibility of a no-deal Brexit increases as each day passes. OUTLOOK | Dark clouds gather following a bright start to the year Although global economic growth will remain resilient this year mainly due to an outstanding H1 2018 performance, dark clouds have begun to swell above the global economy. Escalating trade tensions between the United States and the rest of the world, especially China, represent the main downside risk to the global economic outlook next year. Moreover, although the global economy has been supported by stellar dynamics in the U.S. due to brash government spending and tax cuts, fiscal tailwinds will start to wane next year, which could lead to a sizable deceleration in the world’s largest economy. Despite an uncertain economic outlook, the Federal Reserve has continued to tighten its monetary policy and another rate hike is already penciled in for September. Higher interest rates in the United States are fueling volatility across the global financial markets and have triggered capital outflows from emerging markets.

In Europe, populism is still on the rise, while the long-awaited Brexit deal is still not in sight. Finally, China, which has been a key engine of the global economy over the past few decades, is facing severe challenges such as aggressive financial deleveraging and spillovers from the trade war with the United States. FocusEconomics Consensus Forecast panelists expect the global economy to expand 3.4% this year, which, if confirmed, would represent the strongest expansion in seven years. Panelists see global growth decelerating to 3.2% next year, which is unchanged from last month’s estimate. This month’s unrevised 2019 growth prospects for the global economy is the result of stable economic outlooks for the Eurozone and the United Kingdom. Meanwhile, Canada, Japan and the United States saw upward revisions to their growth forecasts. The Asia (ex-Japan) region is starting to feel the pinch from rising trade disputes, cooling growth in China and financial volatility, which is dragging on the region’s economic outlook for next year. Growth estimates for Eastern Europe are under strain owing to slowing growth in the European Union—a key trading partner— heightened volatility in the financial markets and fading fiscal stimulus in some large economies, including Turkey. While the economic outlook for Latin America for this year remains dim, next year growth should pick up as the economic recovery strengthens in key countries, especially Brazil. Despite higher oil prices, mounting geopolitical risks continue to dent growth prospects in the Middle East and North Africa. The economic recovery in Sub-Saharan Africa will gather steam in 2019 due to stronger performances by heavyweights Nigeria and South Africa.

Overview
Recent data suggests that economic dynamics remain soft in the third quarter following a weaker-than-expected second-quarter expansion. Growth in retail sales, a proxy for private consumption, fell to a six-month low in July on the back of rising external uncertainties and reduced tourist arrivals. Hong Kong’s Purchasing Managers’ Index remained in negative territory in August for the fifth month in a row as escalating trade tensions between China and the United States weigh on economic sentiment. Despite staying at historically low levels, the unemployment rate climbed to an eight-month high in August. Moreover, the island’s high-flying property market is losing steam and could experience a sharp correction in 2019 due to receding capital flows from China and tighter financial conditions.

Although economic growth will remain strong this year due to a robust domestic economy, risks are clearly skewed to the downside. A sharp economic downturn in China, spillovers from the trade war between China and the United States, a strengthening of the HKD against regional peers and higher interest rates all threaten to derail Hong Kong’s solid growth trajectory. FocusEconomics panelists expect growth of 3.6% in 2018 and 2.7% in 2019, which is down 0.1 percentage points from last month’s forecast. Inflation stabilized at June’s 2.4% in July. Rising energy prices and higher residential rents are expected to fan inflationary pressures in the coming months. Moreover, a tight labor market continues to push up domestic inflation. FocusEconomics panelists expect inflation to average 2.3% in both 2018 and 2019. The Hong Kong Monetary Authority (HKMA) manages the Hong Kong dollar within a tight tolerance band to the U.S. dollar, between 7.75 and 7.85 HKD per USD. In an attempt to support a weakening HKD, on 23 August the HKMA intervened in the foreign currency market once again, this time buying HKD 1.8 billion and selling USD 255 million. Panelists expect the island to maintain its current currency peg with the USD at least until the end of our forecast horizon in 2022.

Business Outlook
The Nikkei Hong Kong Purchasing Managers’ Index (PMI), which is released by IHS Markit, inched up from 48.2 in July to 48.5 in August. Despite the increase, the index remains below the 50-point threshold that separates expansion from contraction in the private sector. August’s reading reflected soft client demand, which pushed down new orders and output. Poor demand conditions also weighed on employment and purchasing activities. Export sales to China fell markedly in August on the back of ongoing trade disputes with China. Against this backdrop and in order to boost sales, businesses reduced selling prices despite the increase in input costs as a result of a weaker HKD and higher commodity prices.

Retail Sector
REAL SECTOR | Retail sales growth falls to a six-month low in July Retail sales volumes expanded 5.9% in annual terms in July, decelerating from June’s 9.8% increase and marking the weakest reading since February. The slowdown mainly reflected declining sales for food, alcoholic drinks and tobacco as well as for supermarket sales. Despite remaining robust, sales of luxury items decelerated notably in July. On the flip side, sales of fuels accelerated in July largely due to higher oil prices, while sales of consumer durable goods also gained steam. On a seasonally-adjusted, three-month-moving-average basis, retail sales in the May–July period decreased 1.4% from the preceding three-month period ending in April. The print followed the 0.1% decrease in the three-month period ending in June and represented the largest decline since December 2016. Meanwhile, annual average variation in retail sales volumes inched up to an over four-year high of 8.3% in July from 8.2% in June.

ECONOMY
The economy remains stuck in a deep depression. Despite oil prices hovering at over three-year highs in recent months, oil production continues to fall, plunging by over a third in July in annual terms according to OPEC secondary data. Moreover, although the number of oil rigs—a leading indicator of oil output—ticked up in the same month, it remains close to historical lows. This suggests a continuation of declining production, and with it, diminishing vital oil revenues. On a somewhat positive note, on 20 August, the state-owned oil firm PDVSA reached a payment agreement with ConocoPhillips to settle the USD 2 billion arbitration it was awarded back in April. If PDVSA meets the agreed payment schedule, it could enable the firm to regain control of its Caribbean oil facilities and potentially recoup some of its export losses, as the U.S. company had already moved to seize these assets to enforce its claim. Meanwhile, a series of economic measures started to come into effect that same day with President Nicolás Maduro’s latest attempt to contain hyperinflation and stabilize the freefalling currency. Although it includes moves in the right direction, the reform package is unlikely to achieve its objectives according to analysts. • The outlook remains bleak. The economy will continue to be beleaguered by spiraling inflation, collapsing oil output and exchange rate misalignments. Upcoming hefty external debt repayments and the government’s constrained ability to access financing due to international financial sanctions further compound the country’s woes. Given the severity of the crisis, conditions may emerge for a political transition, a scenario that some of our panelists have already begun to factor into their forecasts. FocusEconomics panelists see the economy contracting 12.1% in 2018, which is down 0.8 percentage points from last month’s forecast. In 2019, the panel sees GDP falling 4.2%. Panelists estimate that inflation ended 2017 at 2,532%. The authorities have introduced a new currency, the bolivar soberano, by knocking off five zeroes from the previous bolivar fuerte, and anchoring it to the petro, the government-created cryptocurrency whose value is linked to the price of the Venezuelan oil basket. However, this is highly unlikely to stem rampant hyperinflation. Our panel forecasts inflation will surge to 679,849% by the end of this year but fall to 456,772% by the end of 2019. • The bolivar underwent a massive devaluation following the recent monetary reconversion, which brought the official exchange rate roughly up to par with that of the parallel market. Nevertheless, the gap between the two has again started to widen. The official DICOM exchange rate ended the 7 September auction at 61.7 VES per USD while the parallel market rate declined to 90.5 VES per USD on the same day. Our panelists expect the official rate to end 2018 at 90.5 VES per USD and 194.0 VES per USD at the end of 2019.

POLITICS
Government enacts sweeping reforms in latest attempt to revive crisis-stricken economy
On 20 August, a series of far-reaching economic reforms came into effect as President Nicolás Maduro once again strived to tackle spiraling inflation, stabilize the freefalling currency and overcome the deep economic crisis gripping the country. His economic recovery plan seeks to address various dimensions of the economy, most noteworthy among which are proposed measures for monetary reconversion, an epic devaluation and a substantial minimum wage hike. Although some policy moves could certainly be considered steps in the right direction, inconsistencies, ambiguities and implementation risks of the reform package are likely to compromise its effectiveness, thus suggesting that the laid-out objectives will not be met. As its headline reform, the government overhauled the currency system by knocking off five zeroes from the bolívar fuerte (VEF) and renaming it as the bolívar soberano (VES). The new currency has been anchored to the petro, the government-created cryptocurrency which is pegged to the price of the Venezuelan oil basket. There are serious doubts, however, over the feasibility of the petro’s use among the public as well as its intended purpose of raising desperately-needed hard currency. Firstly, the petro remains inaccessible to the general population and, while authorities state that sales have already raised USD 3.3 billion for the government, no verifiable evidence has been presented to support these claims. Furthermore, there is little evidence of buoyant trading activity of the petro and it is not sold on any major cryptocurrency exchange platform. The monetary confusion was increased by the announcement that in addition to the exchange rate, the system of prices and wages will also be tied to the petro. It is not clear, however, what this means in practical terms as prices have been linked to a token which selling price is unknown, and thus lacks market value. Despite the ambiguities, the value of one petro was set at USD 60 and VES 3,600, implying a VES 60 per USD official exchange rate. This massive currency devaluation of roughly 95%—one of the largest in history—brought the official exchange rate roughly up to par with the one offered in the parallel market, marking the first time that the government recognized the black-market exchange rate. However, given the significant dependence of the economy on imports, such a steep devaluation will have an enormous impact on prices. Imports will become even more expensive, pushing domestic prices higher via pass-through effects. Finally, despite an attempt to unify the official and black-market exchange rates, recent data shows that the gap has continued to widen, indicating that rampant inflation will persist. Maduro also announced a minimum wage hike, taking effect this month in a bid to shore up household purchasing power, to VES 1,800 (equivalent to half a petro or USD 30), representing a whopping 6,000% increase from the minimum wage last set in June. Monthly pensions were also set at this amount. However, the huge nominal gains are likely to be wiped out in real terms amid the hyperinflationary environment. Moreover, businesses would likely pass on the substantially higher costs to selling prices, thus pushing up inflation. On the other hand, the sudden and sizeable hike in labor costs also runs the risk of squeezing businesses, particularly small- and mediumsized enterprises (SMEs), likely forcing them to lay off workers or shut down operations, especially considering the context of depressed private consumption. Thus, although the measure can be deemed sensible in that FOCUSECONOMICS Venezuela LatinFocus Consensus Forecast | 119 September 2018 it seeks to support buying power for households, it can backfire as it could lead to higher unemployment, lower domestic demand or further inflationary pressures. Moreover, Maduro pledged to pay the difference between the new minimum wage and private sector salaries in SMEs for a 90-day transition period while holders of the government’s Fatherland Card will receive a one-time reconversion bonus of VES 600 (approximately USD 10) to ease the monetary transition. Simultaneously, Maduro ambitiously promised to eliminate the fiscal deficit and halt its monetization. These measures reveal major inconsistencies, however. Foremost, the publicsector wage bill will soar due to the hefty increases in the minimum wage and pensions, allotment of bonuses and transitional costs for businesses. Although a series of tax reforms and other revenue measures are in the works, including a 4 percentage point VAT hike to 16%, higher taxes on upper-income households and partial elimination of costly fuel subsidies, analysts contend the government will not be able to raise sufficient revenue, particularly given the economy is in a state of depression, to cover the surge in expenditures. Therefore, contrary to the stated goals, the fiscal gap will likely continue to widen and would force the government to resort to monetary financing once again—only to stoke inflationary pressures further. All in all, although some measures may appear sensible at first glance— namely the devaluation of the official exchange rate to its effective rate set by the black market and the minimum wage hike to recoup some of the lost purchasing power of households—the reform package as a whole is unlikely to resolve the country’s economic woes. Furthermore, as international financial sanctions continue to constrain the government’s room for maneuver, particularly its ability to access external sources of financing, it is expected that the economy will remain in dire straits.

Federal Reserve Bank of Atlanta

Summary of Economic Activity

Sixth District business contacts indicated that economic activity expanded at a moderate pace since the previous report. On balance, the outlook among firms for the remainder of the year was positive, despite some uncertainty surrounding trade policy. Firms continued to cite hiring challenges, especially for low-skilled and hourly positions. Some businesses reported growing wage pressure. Rising nonlabor costs for select inputs such as transportation and steel were noted, as was an improved ability to pass through price increases. Retailers reported growth in sales, and automotive dealers indicated sales were up year-over-year. Tourism in the District was described as solid over the late summer months, on balance. Residential builders and brokers indicated modest growth compared with year-ago levels; however, diminished lot and land inventory constrained builders' ability to meet demand. Commercial real estate contacts reported strong demand. Manufacturers noted increases in new orders and production.

Employment and Wages

Business contacts reported that labor market growth in select regions was being restrained by firms' inability to recruit staff, particularly among the low-skill/hourly workforce. In response, firms shared plans to move to locations with larger labor pools, to change/reduce personnel standards and requirements, or continue to pursue automation to replace workers.

Contacts continued to report that wage pressure was growing; however, increases greater than 2 to 3 percent remained targeted, rather than broad-based. In response, firms continued to approach compensation creatively (e.g., offer enhanced flexibility, use bonuses and other incentive pay, and offer profit sharing or other forms of temporary compensation that can be discontinued if necessary). Reports from some firms indicated that they were unable to pay the higher wages demanded by experienced job seekers. Instead, they shifted their focus on higher margin business lines or planned to "wait it out" and not to fill the positions.

Prices

Businesses across the District continued to report some increases in nonlabor input costs, specifically relating to transportation and steel, noting slightly more ability to pass along these price increases than in the previous report. Anticipation of rising costs related to tariffs continued to contribute to vendor price increases for commodities. The Atlanta Fed's Business Inflation Expectations (BIE) survey showed year-over-year unit costs were up 2.0 percent in August. Survey respondents indicated they expect unit costs to rise 2.1 percent over the next twelve months.

Consumer Spending and Tourism

District retail contacts reported growth in sales volume since the last report. Solid tourism activity was cited as benefiting retailers and heavily influencing sales activity in some markets. Retailers expect continued positive momentum for the remainder of the year. Automobile dealers reported an increase in year-over-year sales volume.

On balance, District tourism and hospitality contacts reported a strong summer season compared to the same time last year. Summer was robust for Florida tourism activity as occupancy and average room rate surpassed expectations. However, August turned in some mixed results as West Coast beaches were negatively impacted by the "red tide" algae bloom. New Orleans reported a decrease in July occupancy while the average daily rate was up, year-over-year. Preliminary August occupancy reports for New Orleans were stronger than expected. The outlook for the fourth quarter is mixed; some markets expect softer tourism activity year-over-year while others expect growth.

Construction and Real Estate

On balance, reports from District residential real estate contacts indicated modest but ongoing growth. Many builders reported that construction activity was up from the year-ago level. The lack of lot and land availability remained a constraint on building activity. Several contacts stated that even if they had the developed land, construction labor market conditions would keep them from being able to meet current levels of housing demand. District builders expect home sales activity to hold steady over the next few months.

Many District commercial real estate contacts noted continued strong demand. The majority of commercial contractors indicated that on balance, the pace of nonresidential construction activity at least matched the year-ago level, with the exception of retail construction, which was characterized as unchanged to down. Most contacts reported a healthy pipeline of activity, with backlogs greater than or equal to the previous year. Many contacts expressed concerns that uncertainty over increasing materials prices was making bidding and fulfilling projects more challenging. The outlook for nonresidential and multifamily construction among commercial contractors across the District remained positive, with the majority anticipating activity to match or exceed the current level.

Manufacturing

Manufacturing contacts reported strong overall business conditions from mid-July through August. Most firms cited increases in new orders and production. Supplier delivery times were said to be getting longer, while finished inventory levels remained elevated. Uncertainty regarding tariffs and trade policy continued to weigh heavily on manufacturers' sentiment as expectations for future production levels decreased from the previous period. Slightly less than one-third of contacts are expecting higher production over the next six months.

Transportation

District transportation contacts noted increased activity during the reporting period. On a year-over-year basis, railroad traffic was up notably, primarily due to double-digit increases in shipments of grain, petroleum and petroleum products, pulp and paper products, and iron and steel scrap. District ports cited substantial growth in container traffic, breakbulk, and dry bulk freight. Air cargo contacts noted that domestic activity was up due to increased e-commerce shipments; international cargo from Latin America was described as robust, but exports to Europe had softened. Transportation contacts noted no significant disruptions in the movement of freight as a result of changes in trade policy.

Banking and Finance

Earnings continued to improve for financial institutions, driven by a stronger net interest margin. Asset growth continued to slow due to lower demand for credit amid higher interest rates and savings from tax reform. Credit quality remained strong among most financial institutions although underwriting standards loosened for some credit products, particularly residential mortgages. Transaction accounts still comprised the majority of financial institutions' funding, but borrowings were increasingly funding new loan growth.

Energy

Fuel refining capacity utilization continued at a record pace and crude production remained strong. Exports of petroleum products continued to rise. Contacts noted increasing activity offshore in the Gulf of Mexico, including lease purchases for exploration spots. Utilities power generation projects picked up, particularly involving maintenance on power facilities. Utilities sector contacts continued to cite increases in the share of power generation from natural gas. Some contacts expressed concern that tariffs on steel and aluminum may influence the viability of planned industrial construction and plant expansion projects in Louisiana.

Agriculture

Agriculture conditions across the District continued to be mixed. Drought conditions were little changed from the previous report; most of the District remained drought free although there were reports of abnormally dry conditions in much of Louisiana and in parts of Mississippi and Alabama. August production forecasts indicated year-over-year increases in rice, soybean, and cotton, while peanut production was down. Year-over-year prices paid to farmers in June were up for corn, cotton, rice, soybeans, broilers, and eggs, while beef prices were down. However, since the last report, weekly comparisons indicated lower commodity cash prices for some recently tariffed agriculture exports such as soybeans, and the USDA has announced a financial relief program for affected agriculture producers.

Blanchard says the Fed should buy stocks -in addition to treasuries and MBS...during the next down turn. When will this happen? based on the chart below (from the Atl Fed) we are due for one. Everyone loves the new talk about recessions and the latest "25 year business cycles" but how soon does a US recession loom around the corner? When I was speaking in NYC a while back recession was the only topic on the table. Not so much today. Few care to discuss it, and even fewer think it will happen. Animal instincts (economic indicators) aside, we need to seriously consider the next recession, and if that means the Fed begins to buy equities we could have a new era of stability ussured in.  

The following information was originally transmitted by Goldman Sachs research:

Thailand's August headline inflation inched up to 1.6% yoy, from 1.5% in June, led by unfavorable base effects. The reading was above Bloomberg consensus expectations but below ours. Core inflation moderated to 0.7% yoy in August from 0.8% in July. Today's inflation reading takes the annual average of headline inflation (the inflation target measure of the BOT) to 1% yoy, within the 1%-4% target band for the first time since March 2015.







Key numbers: Headline August CPI: +1.6% yoy (+0.2% mom s.a. by GS) vs. Bloomberg consensus: +1.5% yoy; GS forecast: +1.7% yoy; Previous: +1.5% yoy (+0.2% mom s.a.) Core CPI: +0.7% yoy vs. Bloomberg consensus: +0.8% yoy (+0.0% mom s.a.); Previous: +0.8% yoy (+0.0% mom s.a.)