In what seems to be a fantastic example of regulatory overreach and with added extra levels of industrial inability, California has single-handedly made the whole situation surrounding gig work and freelance work one massive, unthinkable disaster. The disruptors that have chosen to build companies in Silicon Valley have been handled a red card checking them for taxes and regulation. While this very well may end much of the rabid "regulatory innovation" systems that go on in NorCal, it will not end the platform of freelancing across the US, just in California. Dependent on Nevada law, companies could relocate and still hire SF area employees, in some capacity. Granted, that sort of activity now would be a risk as new law allows the state to file suit against corporations for breaking such laws. Overreach in our book. - Chaganomics 

From the LA Times:

Groundbreaking new California legislation impeding many companies from claiming workers are independent contractors takes effect in 2020. California businesses will soon face new limits in their use of independent contractors under a closely watched proposal signed into law by Gov. Gavin Newsom on Wednesday, a decision praised by organized labor but unlikely to quell a growing debate over the rules and nature of work in the 21st century economy (link).   

From the San Francisco Chronicle:

“The law also gives cities in the state the right to sue companies for violating the law, where previously I they could not. The California Attorney General's office and local prosecutors can also sue companies

(link).

From Focus Economics:
Hong Kong's Outlook Worsens


Ongoing protests contributed to the softest expansion in nearly a decade in Q2 and data for Q3 suggests activity remains dismal. Retail sales plunged in July, while the PMI continued declining in July-August. Moreover, public unrest, trade tensions and weaker domestic growth are weighing on the all-important Hong Kong real estate market, which bodes poorly for investment and business confidence. That said, July’s pick up in domestic credit growth should be buffering domestic demand. In other news, Fitch Ratings downgraded Hong Kong’s credit rating one notch from AA+ to AA with a negative outlook on 6 September, citing turmoil with China denting the island’s reputation for stability and ease of doing business. In politics, Carrie Lam, Hong Kong’s chief executive, announced the withdrawal of the extradition bill in early September, however, the move did little to calm protests.

Hong Kong’s outlook continues to moderate amid civil unrest, escalating global trade tensions and deteriorating prospects for China. Turning to 2020, growth will likely gain momentum on stronger household spending and an expected rebound in fixed investment, although the outlook will partly hinge on current political developments. Our panel expects growth of 0.9% in 2019. Moving to 2020, the panel expects the economy to grow 1.8%, which is down 0.2 percentage points from last month’s forecast.

The IHS Markit Purchasing Managers’ Index (PMI), plunged from 43.8 in July to 40.8 in August, marking the lowest reading since February 2009 amid mass protests and elevated global trade tensions.

The decline was mainly driven by sharper falls in production and new orders. Record-low demand from mainland China, mainly the result of a weaker yuan, the U.S.-China trade war and protests, was behind the steep plummet in new order intakes. Moreover, business sentiment deteriorated sharply. On the price front, both input and output prices were reduced in August. Commenting on August’s print, Bernard Aw, an economist at IHS Markit, noted: “The latest PMI data reveal a Hong Kong economy flirting with recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis. The survey is now broadly indicative of the economy contracting at an annual rate of around 4.0-4.5%.”

From Goldman Sachs:
The S&P/Case-Shiller 20-city home price index remained flat in July (mom sa), below consensus expectations for a small increase. The measure still appears to be influenced by seasonal adjustment challenges, and we place more weight on the year-on-year reading, which decelerated to +2.0% from +2.2% in June and the slowest pace since August 2012. Prices rose in 17 of 20 cities (mom sa), with San Diego (+0.6%), Seattle (+0.5%), and Charlotte (+0.5%) showing the largest month-on-month increases, and New York (-0.4%), Los Angeles (-0.4%), and Washington D.C. (-0.1%) showing the largest month-on-month decreases.

The FHFA house price index increased by 0.38% in July (mom sa), and the year-over-year rate rose by 0.1pp to +5.0%. Home prices rose in all 9 regions in July, with the Mountain (+1.2%), New England (+0.8%), and Pacific (+0.5%) regions showing the largest month-on-month increases.

__
From Marketwatch August 27, 2019:
Home prices are rising at the slowest pace since 2012, Case-Shiller finds: just 2.1%

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From Chad Hagan:
Let's chat about this for a moment. It was my impression last fall we were entering a recession. Irregardless, there are grand signals of a recession popping up in the American economy left and right.  Mortgage underwriting and housing is a very fragmented in the US , so what is felt by some is not felt by all. However, it is important to note that housing coast to coast is experiences some set back, and it is largely a buyers market.

Here is a number of news reports on the recent news. 

"Thomas Cook, a 178-year-old British travel company and airline, declared bankruptcy early Monday morning, suspending operations and leaving hundreds of thousands of tourists stranded around the world. The travel company operates its own airline, with a fleet of nearly 50 medium- and long-range jets, and owns several smaller airlines and subsidiaries, including the German carrier Condor. Thomas Cook still had several flights in the air as of Sunday night but was expected to cease operations once they landed at their destinations." - Insider

"The UK's Civil Aviation Authority (CAA) is co-ordinating the repatriation, the biggest in peacetime, after the tour operator "ceased trading with immediate effect". Thomas Cook's administration puts 22,000 jobs at risk worldwide, including 9,000 in the UK. Boss Peter Fankhauser said the collapse was a "matter of profound regret". Thomas Cook, whose roots go back to 1841, went bust after last-ditch talks to raise fresh funding failed. The BBC understands the government was asked to fund a bailout of £250m, which was denied." - BBC

Bosses took “serious” payouts from Thomas Cook - DailyMail 

“The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” - Lord Lionel Robbins (1935)

The principles of supply and demand are foundation of economics. In this we find the product (supply) that the consumer wishes to buy (demand) and in that we find price discovery and many other dynamics inside supply and demand like premiums, discounts and inventory. - Chad Hagan

"Market Clearing"
The price and quantity that equates the quantity demanded and quantity supplied; equates the demand price and supply price; and achieves market equilibrium. In other words, the market is “cleared” of shortages and surpluses. - AmosWeb

Adapted from Chad Hagan's presentation at Skytop Strategies Impact Investment Conference; Boston, Massachusetts, September 17, 2019

Electric Cars: The Impact of Changing Societal Values on the Auto Industry

The impact of changing societal values on the auto industry is one we are all well aware of and I will attempt to point out a few bits of insight I see in the market from my research.

The recent attacks on multiple Saudi Arabian petroleum processing facilities has shaken up what is roughly 5% of global supply. 

While there are long term oil reserves, they are largely strategic, and the recent unlocking of US reserves helps illuminate how dependent we are on global oil.

Our daily burn rate of oil is staggering around 90 - 100 million barrels per day. 

“The total worldwide oil consumption was 93 million barrels per day (bbl/day) 2015” - International Energy Agency (IEA)

While changing values in society have created a market for EV’s - this has come after a period of deep neglect. 

One of the central issues with automobiles is their dependency on oil and the carbon footprint from such heavy industry.

Electric vehicles are better but the manufacturing of electric automobiles is far from carbon free. From plastics to textiles and electronics; not to mention the constant roll out of new models, ad campaigns and marketing spends - there is a massive amount of cultural and environmental waste. 

The US is the second largest polluter behind China, and China has been active a third the amount of time. If this were thirty years ago, the US would surely be the largest. 

I had a great talk about this in London last week, and sadly if you add in California with the fires and earthquakes, the US simply tops the charts. Despite the green revolution in California, one must admit the state creates a staggering amount of carbon organically, let alone from their mega cities.

Automobile manufacturing is a form of great pride to many families, nations and empires. FIAT heir Gianni Agnelli said it best in the 1970’s when he spoke about building the cars first, giving cars to the consumer and then watching policy follow suit by building roads, and entrepreneurs developing destinations and so forth and so forth. Think of Citronen, Porsche, Ford, Fiat, Delorean, and Tesla - but no matter the destination, the United States did it best.

The US defined the automobile way of life - numerous regions had deep car cultures with subsets and segments like drag racing and surfing; the family station wagon or perhaps a Jeep for camping and hunting. Cars in America guaranteed part of the American dream, they even promised teenage independence. Even Hollywood stepped in. Hollywood helped make the idea of a road trip common place. At a broader level an extended domestic rail system for the commuter and traveler in the States never happened. 

We exported that way of life. Look only to South Korea to confirm the example of heavy industry American style. The South Koreans have in turn exported our model back to us in the form of foreign direct investment and employment base. They are intertwined in the southeast, specifically in Georgia and Alabama where they have holdings which provides thousands of local high paying jobs 

A bit of history:

It wasn’t always this easy. For some time the horse and carriage ruled the road, especially here in Boston. When automobiles first arrived, they came in the promise of a horseless carriage. One had to compete with the horse and the horse drawn carriage so a motorized carriage was the centralized promise. 

The first promise was delivered in the 1700s. The year was 1769. The 1st steam-powered auto, able to carry humans is built by Nicolas-Joseph Cugnot. It was basically a “mechanical land-vehicle” - the vehicle was huge, and only went 2 miles an hour. Still, it sold reasonably well. In 1771 an incident occurred where the driver of one of Cugnot's land-vehicles lost control and ran into a wall. This mishap is often credited as being the world's first automobile accident. 

The market slowly moved away from steam and into combustion. 

In 1808, François Isaac de Rivaz designed the first car powered by an internal combustion engine fueled by hydrogen. 

In 1870 Siegfried Marcus built the gas combustion engine;

In 1885 Karl Benz opens shop;

In 1899 FIAT is formed in Italy;

In 1899 The Detroit Automobile Co. was founded, I believe Henry Ford’s first commercial automobile company;

Electric vehicles on the other hand were largely neglected but they had a legitimate presence. EV’s are not from last century, but as far back as the 1800s. In the 1830s Scottish inventor Robert Anderson invented the first carriage powered by non-rechargeable primary cells - so this would be the first electric carriage. Electric vehicles were produced commercially in the United States until the Model T, powered on gasoline, came to dominate. Gasoline won out for a number of reasons, including it being readily available and capable of fueling longer ranges. 

In the United States it wasn't until the 1960s and 70s that consumers began requesting EV’s in some capacity.  This was largely after the oil crisis in the 1973 oil crisis (October 1973 – March 1974); 

I guess we can claim that between 1975 and 1990 we were back in the throw of big oil and the mentioning of EV’s was just novelty.  

However, in 1990 California passed a Zero Emission Vehicle (ZEV) Mandate. The program was landmark and proved to be highly influential. 

Since 2010, more than 500,000 zero-emission vehicles and plug-in hybrids have been registered in California. I imagine a great deal more since that is a figure from a decade ago. 

The ZEV mandate likely nudged GM to produce their EV, entitled the EV1, it was produced from 1996 - 1999 and sold through their Saturn subsidiary. At 100% electric and the range was about 100 miles. 

What is clear is that electricity - or alternative fuels from non-fossil sources - could have been used to power autos - instead of gasoline - over 100 hundred years ago. Perhaps electric autos lacked the technology and power to fuel transportation initially, but they certainly fell behind by attrition, negligence and devotion to the oil barons. 

In the US from 1920 - 1970 the market and powers that be turned their backs on the idea of EV’s in the marketplace. 

This has caused other movements in the energy world: wind, hydro, nuclear and also clean powered vehicles for all types of transportation. Clearly, apart from batteries, Eventually we will see 100% clean fuel, or at least renewable fuels, and this will allow airplane and container ships to travel around the world without the associate pollutants - to some regard. 

It is estimated in London that emissions permits will be on of the most traded securities in the next ten years. However, it is still hard to add up the market share for forecasting at my office.

We have a lot of questions about the free market mechanics behind permits and trading and well as how it all adds up. 

The move away from carbon comes after a minimum fifty year run for carbon producers who effectively had a monopoly from gasoline. Where are we now in the US with the major automobile manufacturers rolling back sedans and coupes to center on heavy trucks and SUVs? How will those be efficient powered to be effective in the market place when a bigger emphasis is being put on size and that regards added weight? 

From a family office investment perspective, we kicked the tires on a deal in 2018 - it was a roll up consisting of numerous dealerships - and from what we could see, the sales, services and supply chain could easily support the mass introduction of EV, so long as EV charging times continue to develop, and maintenance expands.  

EV’s will eclipse the internal combustion engine—one day. Before this happens, in order for it to happen we need a tighter framework of regulation and better incentives for innovation - much like what I see in London and Europe. 

Numbers & Markets:

Despite the intense fever and furor for electric vehicles, they are quite rare. 

At this moment EV’s account for a minuscule percentage of annual auto sales. 

Market leaders at this moment are Tesla in the US and BYD in China. A decent product, Tesla has attracted intense emotional response, fandom and devotion; at the same time foes and enemies. However, because of Tesla electric vehicles have entered the consumer market place indefinity. 

BYD Auto, short for Build Your Dreams, was established in 2003 and markets the brand in China. It specializes in electric vehicles and has a joint venture with Daimler. 

As far as market share, Norway leads (46% in 2018), followed by Iceland (17%) and Sweden (8%).

Estimated 2018 EV sales:

China (1M+) 

Europe (385K) 

United States (361K) 

These three regions accounted for 90% of all sales in 2018. 

Peak passenger vehicle oil demand is forecasted for 2028; commercial vehicle peak oil demand peaks in 2035. By 2040 over 50% of all passenger vehicle sales will be electric vehicles, with the commercial fleet and e-buses following - Bloomberg NEF.

Note: Facts and figures came from Bloomberg NEF, EIA & Zermatt Research.

While the spike in repo and other short-term rates can be attributed to a confluence of events that resulted in a large swing in the US Treasury’s cash balances, the extent of the move suggests either that reserves may be closer to their “terminal level” than previously thought, and/or that intermediation is currently constrained. The stress could persist in the near term without Fed intervention, but is not a “systemic risk” issue in our view.

Our projections for reserve balances and recent price action suggest that reserve injection on the order of $100-$150bn may be necessary over the next few weeks to keep the policy rate within the target range. While we expect a pick-up in reserve balances in late October/early November, this pick-up is likely to prove temporary. Therefore, rather than engage in temporary OMOs over long periods, the Fed may choose to expand its balance sheet by an amount offsetting non-reserve liability growth as early as October, when it announces its next round of Treasury reinvestment purchases.

- Goldman Sachs Research

Uncertainty over Saudi oil – ICE Brent prices settled yesterday with a gain of around 15%, the largest one-day price increase in at least two decades, after Saudi Arabia reported a supply loss of nearly 5.7MMbbls/d. Saudi Aramco is still reported to be assessing the damage on the plants; however, a quick restoration of full capacity can probably be ruled out. The latest market reports suggest that the company may restore some of the capacity quickly (within a matter of days) but a significant part of the impacted capacity could take weeks or even months to repair and restore completely. Saudi Arabia said that it will use existing inventories to fill the supply gap; however, as we discussed earlier, inventories have already been depleted this year due to output cuts and the supply gap could be overwhelming if the current output disruptions are prolonged.

- ING Economics 

I am writing this post after a return from London, where you have a great many of smokers and smoking culture. There is also a lot of vaping and vape shops. The EU is in favor of a broader distribution of vaping devices but they take a common sense approach to regulation. Nicotine, for instance, and nicotine amounts per milligram are regulated. A question we must ask ourselves in America is: "is vaping better than combustible cigarettes and should it be regulated". Off the cuff the answer seems obvious. However, from a medical standpoint:

"E-cigarettes heat nicotine (extracted from tobacco), flavorings and other chemicals to create a water vapor that you inhale. Regular tobacco cigarettes contain 7,000 chemicals, many of which are toxic. While we don’t know exactly what chemicals are in e-cigarettes, Blaha says “there’s almost no doubt that they expose you to fewer toxic chemicals than traditional cigarettes. - Johns Hopkins”

On this, vaping is bad for you. Smoking cigs is bad for you. Vaping is a healthier option but it still bad for you.  Also, vaping is still addictive. Let us look at cigars and cigarettes. Cigars are not terribly bad for you in moderation, but if you smoke them daily and if you inhale them, they are seriously bad for you.

Switching from cigarette smoking to cigar smoking can be particularly harmful because you might inhale cigar smoke the way you inhaled cigarette smoke. The more cigars you smoke and the deeper you inhale, the greater the risks. Although the health effects of occasional cigar smoking aren't as clear, the only safe level of cigar smoking is none at all. Instead of trying to choose between cigarette smoking and cigar smoking, try to quit tobacco entirely. There is no safe form of tobacco. J. Taylor Hays, M.D.

What can I say about this US? Well, the United States typically believes that the state level market dictates issues that then merit federal intervention. They are very hands off. In the world we live in today there is a loophole which allows for bad actors and greedy players to flood the market with their quasi-safe or not-safe-at-all product and it goes straight into the population where they are treated like guinea pigs in a consumer product experiment. At an extreme example is Heroin, OxyContin and Fentanyl. As for marijuana and THC, the absolute lack of regulation has put many buyers at the risk of the ethics of the manufacturers. Essentially, drug dealers who are squeezing out products and adding in extenders, or "cutting the drug" with whatever they deem appropriate, almost never attached to a scientific process.

The filled cartridges are not by definition a health risk. However, Mr. Downs, along with executives from legal THC companies and health officials, say that the illicit operations are using a tactic common to other illegal drug operations: cutting their product with other substances, including some that can be dangerous. - NYT

The US needs to set standards for nicotine, CBD, THC and other marketable smokeable vape cartridges and oils. Additionally, whatever base liquid is used for nicotine (as we all know what is the base for CBD/ THC)  we need strict regulations so as not to have a continued public health crisis. - Chad


Links & Sources:

1) Global Tobacco Laws:
https://www.globaltobaccocontrol.org/e-cigarette/country-laws/view

2) Johns Hopkins 5 Vaping Facts You Need To Know:
https://www.hopkinsmedicine.org/health/wellness-and-prevention/5-truths-you-need-to-know-about-vaping

3) The Walter White of Vape Cartridges:
https://www.nytimes.com/2019/09/15/health/vaping-thc-wisconsin.html?action=click&module=MoreInSection&pgtype=Article&region=Footer&contentCollection=Health





+ Disclosure:
I am an investor in companies that manufacturer smoking devices and import Cuban tobacco.

What happened? Early Saturday saw the use of drones to attack crude oil processing plants in Saudi Arabia, with the 7MMbbls/d Abqaiq plant hit, whilst the 1.45MMbbls/d Khurais oilfield was also hit. The Saudi energy ministry has said as a result of the attacks, 5.7MMbbls/d of crude oil output has been affected, along with 2bcf/d of natural gas production. The Iranian-backed Houthis in Yemen have claimed responsibility for the attack, and follows the attacks we saw on Saudi oil infrastructure earlier this summer. However, this time around it has been significantly more disruptive, with 58% of Saudi oil output affected. Fortunately, reports suggest that there were no casualties with this latest incident.

What now for the oil market? Clearly these latest developments are bullish for the oil market. In recent months, market participants have failed to price in a risk premium around Middle East tensions, despite a number of incidents over the summer. Instead, the market has been focused on trade developments and the broader macro environment. However now with almost 20% of OPEC production taken offline over the weekend, this is likely to change. How bullish will really depend on how long the outage lasts. There have been reports that production could return to normal in a matter of days, which if the case means the upside would reflect more of a risk premium, rather than a significant tightening in the market. However, we believe any indication or confirmation from the Saudis of a prolonged outage, would see Brent trading back above US$70/bbl in the near term. It is not just the flat price that is poised to move higher, nearby time spreads are also likely to move deeper into backwardation, reflecting the tightening in the prompt physical market. OPEC+ production cuts in recent months have already been supportive for spreads, and this latest development will likely only give them a further boost higher.  However looking beyond the supply lost from this incident, the attack does highlight the vulnerability of the Saudi oil infrastructure. Whilst many have been worried about disruptions to oil flows through the Strait of Hormuz, this latest incident does suggest that such attacks can prove even more disruptive. Furthermore, is the uncertainty of how the Saudis will respond to the attack, but what is certain is that the market needs to price in a risk premium for the simmering tension in the region. Finally, the exit of John Bolton as the National Security Advisor to President Trump suggested that we could see the US relax its stance with Iran when it comes to sanctions. However, this latest incident means that it is an unlikely scenario now. Following the attack, US Secretary of State Mike Pompeo was not shy to put the blame on Iran.

Can the market manage with this lost supply? The Saudis have said that they will use inventories to meet exports. If we see a disruption of only several days, then the market should be able to absorb these losses fairly easily. However, if outages start to run into weeks, this would leave the market increasingly tight. Looking at the Joint Organisations Data Initiative data, Saudi crude oil inventories have been in steady decline since 2015, and this is no surprise with ongoing production cuts. At the end of June, crude oil inventories stood at almost 188MMbbls - down from around 205MMbbls at the end of 2018. This is equivalent to around 26 days of crude oil exports. Current levels are likely to be even lower, with the continued deep production cuts that we see from Saudi Arabia. The US Department of Energy has also said that it would act if needed, by turning to its strategic petroleum reserves, which stand at 645MMbbls. The International Energy Agency also said that is was following current developments closely, but for now believes that there are adequate commercial stocks to absorb production losses.  Finally, a prolonged outage could mean that OPEC+ relaxes production cuts. However whilst this may help, it would not be enough to make up for the full Saudi shortfall. There are only a handful of OPEC+ members that can bring a meaningful amount of output onto the market. Between Russia, UAE, Kuwait and Iraq, we could see them bring in the region of 800-900Mbbls/d of production online, which is significantly less than the outage in Saudi. The issue for the market is that more than 70% of OPEC spare capacity sits in Saudi Arabia. Link to PDF of article from ING Economics

Friday the 13th Consumer News

USA: Retail Sales Rise Further in August; Import Prices Decline in August. Headline retail sales increased by more than expected in August. Core retail sales increased by 0.3%, in line with consensus expectations, but revisions to prior months were somewhat negative. Import prices declined in August, in line with consensus expectations, and non-petroleum import prices were flat for the second consecutive month. Today’s import price data had a modest downward impact on our August core PCE estimates, and we lowered our month-over month and year-over-year forecasts by 0.01pp to +0.14% and 0.02pp to +1.70%, respectively. Today’s retail sales report suggested upside risk to our GDP tracking estimates, which we will finalize after the mid-morning data. 

Research from GS

In my opinion one would have to be blinded by greed to even consider such. HKEX already owns LME (metals exchange), no point in merging LSEG, no point at all. So you really think it would be in safe hands? That said, there is a silver lining - the market isn’t keen to the idea. Let’s keep it that way. 

- Chad Hagan, London (September 12, 2019)

—

Serious doubts about Hong Kong’s £32 billion offer for the London Stock Exchange grew on Thursday just one day after the daring bid emerged.  Investors say the deal could fail over price, regulatory and political concerns even in the unlikely event that the LSE’s management backed the offer.

The first opportunity investors in Hong Kong Exchanges and Clearing (HKEX) had to react to the deal saw the shares fall more than 3%, taking $1 billion off the value of the company.  With growing talk in the City that HKEX is in effect controlled by the Chinese, the LSE is widely expected to formally reject the deal.  LSE shares fell again today, off 16p at 7190p, far below the 8361p at which the offer was valued yesterday. That suggests shareholders think it highly unlikely the bid will succeed.

Full story at the Evening Standard 

Full story at the Evening Standard

“Italian industrial production fell by 0.7% mom in July, compared with expectations of a smaller decline. The weakness was driven by investment goods. Growth in industrial production in June was also revised down.”

- Goldman Sachs Research

OVERVIEW
The economy likely continued to contract in the second quarter. Private consumption should have been tepid, as suggested by declining retail sales throughout the period, amid still-high inflation and a rising unemployment rate—which reached an over-decade high in May. Moreover, the industrial sector was subdued, as evidenced by falling industrial output in April–June. More positively, the current account deficit narrowed markedly year-on-year, although this was largely due to weak domestic demand. Turning to the third quarter, signs are scarcely more encouraging. In July, the manufacturing PMI was deep in contractionary territory, while vehicle sales plummeted as government tax incentives expired. That said, the Central Bank’s rate cut in July should be providing some impetus to activity, while tourist arrivals were up 17% year-on-year in the same month, supported by the weak lira.

REAL SECTOR
Industrial output declines further in June Turkish industrial production fell 3.9% year-on-year in June, down from May’s 1.3% fall. The drop in production was driven by faltering manufacturing output, while the electricity, gas and steam, and mining and quarrying sectors rose. Sequential data was also downbeat; industrial output fell 3.7% over the prior month in June on a seasonally- and calendar-adjusted basis, contrasting May’s 1.2% increase (previously reported: +1.3% quarter-on-quarter seasonally adjusted).

OUTLOOK
Sentiment among Turkish consumers improved slightly in August after dropping to a near-record low in July, with the consumer confidence index rising to 58.3 in August from 56.5. As a result, the index inched closer to the neutral 100-point mark, but remained deeply entrenched in pessimistic territory. August’s uptick was due to consumers’ less pessimistic assessment of the economic outlook and their financial situation. Moreover, households held Industrial Production | variation in % Note: Year-on-year and annual average variation of industrial production index in %. Source: Turkish Statistical Institute (TurkStat) and FocusEconomics calculations. -12 -6 0 6 12 18 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Year-on-year Annual average % Purchasing Managers’ Index Note: Istanbul Chamber of Industry (ICI) Purchasing Managers’ Index (PMI). A reading above 50 indicates an expansion in business activity while a value below 50 points to a contraction. Source: IHS Markit and ICI. 40 45 50 55 60 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Consumer Confidence Index Note: Consumer Confidence Index. Values above 100 indicate an optimistic outlook while values below 100 indicate a pessimistic outlook. Source: Turkish Statistical Institute (TurkStat). 40 60 80 100 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 FOCUSECONOMICS Turkey FocusEconomics Consensus Forecast | 90 September 2019 less negative expectations for the labor market in August and their probability of saving improved. FocusEconomics Consensus Forecast panelists see private consumption declining 3.4% in 2019, which is down 0.1 percentage points from last month’s forecast, before expanding 2.5% in 2020.

The slightest stall in German exports sends shockwaves around the world - Chad



A flash estimate revealed that the economy contracted in the second quarter of the year. Although a breakdown by components is not yet available, the external sector seems to have been the culprit for the weak showing: Exports shrank in Q2 as sustained trade tensions and lingering Brexit-related uncertainty curbed external demand. Domestically, however, the picture appears to have been somewhat brighter in the quarter. Household consumption rose on a still-tight labor market, while fixed investment seemingly continued to grow despite falling investment in the construction sector. Turning to Q3, manufacturing and services PMI data in July–August points to weakening domestic activity, while available survey-based indicators show that sentiment among businesses and consumers continued sliding. Against this backdrop, pressures have been mounting for the government to relax its fiscal rules, with a fiscal stimulus package reportedly already in the works in the event of a recession. • Growth is set to slump this year on softening domestic demand and a flagging external sector. That said, a tight labor market and higher public spending should buttress consumption and, in turn, the overall economy. Risks are tilted to the downside due to ongoing global trade tensions, slowing Chinese growth and Brexit uncertainty. FocusEconomics Consensus Forecast panelists expect the economy to expand 0.7% in 2019, which is unchanged from last month’s forecast, and 1.1% in 2020. • Harmonized inflation fell to a 32-month low of 1.1% in July, from 1.5% in June. July’s drop was chiefly driven by lower prices for education as well as for recreation and culture, which was partly attributed to a methodological change concerning package holidays. Inflation should remain subdued going forward as the economy loses traction and oil prices remain weak. Our panelists project average inflation of 1.5% in 2019 and 1.6% in 2020.

Preliminary data released by Germany’s Statistical Institute showed that the economy contracted 0.1% on a seasonally- and calendar-adjusted quarter-on quarter basis in the second quarter, contrasting the 0.4% expansion logged in the first quarter. Furthermore, on an annual basis, GDP recorded zero growth in the second quarter.

Consumer sentiment eased further in August, as the GfK Consumer Climate index inched down to an over two-year low of 9.7 in August from 9.8 in July, while backward-looking data for July highlighted the current dichotomy in the German economy; “it is apparent that the global economic slowdown, trade conflict and Brexit discussions are having an ever increasing impact on consumer confidence”, GfK noted. Economic expectations dropped markedly in July and fell into pessimistic territory for the first time in over three years. In fact, economic expectations Purchasing Managers’ Index 47 50 53 56 59 62 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Note: Markit Composite Purchasing Managers’ Index (PMI). A reading above 50 indicates an expansion in business activity while a value below 50 points to a contraction. Source: IHS Markit. FOCUSECONOMICS Germany FocusEconomics Consensus Forecast | 128 September 2019 reached its lowest value since November 2015. The outlook on the economy is chiefly affected by lingering trade tensions and the uncertain Brexit outcome as well as the global loss of economic momentum. In the same vein, propensity to buy dropped to its lowest reading in nearly four years, but remained healthy overall, likely reinforced by households’ strong income expectations as the labor market remains tight—unemployment stood at 5.0% in June. However, data also suggests that the “employment boom of the past few years [is] slowly coming to an end”.

Business sentiment among German firms sank to an over six-year low in July with the ifo Business Climate Index dropping to 95.7 from a revised 97.5 in June (previously reported: 97.4). The headline figure reflected a deteriorating view on the economic climate in the months ahead as well as a swing from optimism to pessimism regarding the outlook on the current situation. “The German economy is navigating troubled waters”, Clemens Fuest, President of the ifo Institute, noted.


Thank you Focus Economics

Forecast for the United Kingdom 

The economy unexpectedly contracted in the second quarter, driven by destocking following a surge in inventories in the first quarter, and suppressed fixed investment. More positively, private consumption was upbeat, on decade-high wage growth and solid job gains, while strong public spending also cushioned the fall. Although the external sector contributed to growth, this was driven by plunging imports, as exports contracted amid a tougher global trading environment. Looking to the third quarter, momentum is likely muted. While the services PMI rose in July, it signaled only modest growth, and the manufacturing PMI remained in contractionary territory. That said, robust retail sales in the same month suggest consumer spending is supporting activity in Q3, and an inventory build-up towards the end of the quarter in preparation for a no-deal Brexit could temporarily boost headline GDP.

Underlying momentum is likely to be meek in H2, held back by soft business investment and weaker growth in key trading partners. However, higher wages and a more expansionary fiscal stance should prop up activity, while inventory changes as firms prepare for a no-deal will likely distort GDP figures. The highly uncertain outcome of Brexit remains the key risk to the outlook. FocusEconomics panelists expect GDP growth of 1.2% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists also see the economy expanding 1.2%.

Economy contracts in Q2 for first time in nearly seven years amid destocking and tumbling fixed investment

The UK economy shrank 0.2% in quarter-on-quarter seasonally-adjusted terms in Q2, contrasting Q1’s 0.5% quarter-on-quarter expansion. The figure marked the worst reading since Q4 2012 and significantly undershot market expectations of a flat reading. While several FocusEconomics panelists had been banking on a contraction, it caught the majority of panelists by surprise. In annual terms, growth slumped to 1.2%, down from Q1’s 1.8% year-on-year expansion. The decline was driven by a sharp fall in fixed investment (Q2: -1.0% qoq; Q1: +1.2% qoq), as the uptick in business investment seen in the first quarter proved fleeting, while government investment was also down sharply. Destocking following a surge in inventories in Q1 was another key piece of the picture, subtracting 2.2 percentage points from the headline GDP reading. In contrast, private consumption (Q2: +0.5% qoq; Q1: +0.6% qoq) and government consumption (Q2: +0.7% qoq; Q1: +0.8% qoq) cushioned the fall, bolstered by above-inflation wage growth and a laxer fiscal stance respectively.

Exports were also down sharply (Q2: -3.3% qoq; Q1: +1.5% qoq), amid a more adverse global trading environment and weaker momentum in the Euro area. However, this was more than offset by a huge slide in imports linked to falling inventories (Q2: -12.9% qoq; Q1: +10.8% qoq). As a result, the net contribution from the external sector swung from minus 3.0 percentage points in Q1 to plus 3.5 percentage points in Q2. Looking ahead, a second inventory build-up ahead of the new Brexit deadline of 31 October could provide a temporary boost to the economy in the coming months; that said, as seen in the H1 figures, this effect would be offset by a subsequent drawdown of stocks. Underlying momentum will likely remain limp due to suppressed business investment, despite solid private and public consumption. Overshadowing all this is the outcome of Brexit: A no-deal exit would severely dent activity in the near-term, while an expedient solution to the current impasse could unleash pent up investment.

Housing: According to the Nationwide Building Society (NBS), house prices in the United Kingdom rose 0.3% in July, up from June’s 0.1% increase. On an annual basis, house prices also rose 0.3% in July, down from June’s 0.5% uptick. The average house price in July was GBP 217,663 (July 2018: GBP 217,010). The broad picture is unchanged; the property market is in a soft patch, weighed on by weak consumer sentiment and Brexit uncertainty. The market is likely to stay sluggish in coming months in the runup to the new Brexit deadline of end-October. However, assuming a no-deal Brexit is avoided, house price growth should pick up somewhat, supported by favorable demographics and a strong labor market.

Interview With Oxford Economics

How will victory for Boris Johnson affect fiscal policy?
Johnson’s campaign gave the clear impression that he plans to loosen fiscal policy, but it remains to be seen whether he follows through on his promises. We’ve modelled the impact of his four main pledges – increasing the income tax higher rate threshold, raising the starting point for paying National Insurance Contributions, increasing the education budget and employing more police officers – and we estimate that the package would raise GDP growth by around 0.2 ppt a year for the next three years, if delivered alongside an orderly Brexit. The boost is fairly limited because the policies – particularly the increase in the income tax threshold – are poorly targeted.

What does victory for Boris Johnson mean for the pound?
From our perspective, Brexit is going to be the key driver of movements in the pound. The recent weakening came because markets perceive that no-deal risk has increased with Johnson’s victory, which is something we agree with. If Johnson can ensure an orderly Brexit then we would expect sterling to strengthen, given that it is currently heavily undervalued. But a no-deal Brexit would likely trigger a further depreciation, probably to $1.10 or perhaps lower.

Will victory for Boris Johnson have any bearing on inflation and monetary policy?
Brexit will also be pivotal to prospects for inflation and monetary policy. An orderly Brexit should see sterling strengthen and inflation slow. With the MPC preoccupied with the risk that a tight labour market could drive up inflation, they would probably continue to keep policy unchanged, rather than follow other central banks in cutting interest rates. But in a no-deal scenario, the sterling depreciation would drive up inflation, probably to around 3% in 2020. And it is likely that the MPC would ignore the prospect of temporarily higher inflation and cut interest rates in order to cushion the blow to demand.

In your view, how does Boris Johnson becoming PM affect the likelihood of different Brexit scenarios?
We see Johnson’s victory as raising the chances of the UK leaving the EU in October, with both the deal and no-deal options looking likelier than before. But we still see an extension as marginally the most likely outcome. Even if there was the will, there is not sufficient time to renegotiate the withdrawal agreement, while parliamentary opposition to the deal and no-deal options is firmly entrenched. Ultimately an extension looks like being the path of least resistance and we think that the EU would agree to one more extension to March 2020, particularly if it was to give time to hold an election.

Cartoon by Patrick Chappatte, Le Temps, Switzerland

Major Economies & Global Update

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The World
Global growth is set to ease this year, due largely to weaker momentum in developed economies and China. However, tight labor markets and more accommodative monetary policy should provide some support. A further escalation of trade tensions, particularly between the U.S. and China, is the key downside risk.

United States
While economic growth seems set to ease in H2, with a weaker global outlook and the ongoing U.S.-China trade dispute weighing on business investment, manufacturing and exports, resilient consumer spending and lower borrowing costs should cushion any slowdown. The key downside risks stem from a prolonged trade row and high corporate debt.

United Kingdom
Underlying momentum is likely to be meek in H2, held back by soft business investment and weaker growth in key trading partners. However, higher wages and a more expansionary fiscal stance should prop up activity, while inventory changes as firms prepare for a no-deal will likely distort GDP figures. The highly uncertain outcome of Brexit remains the key risk to the outlook.

Europe
Growth is seen slowing sharply this year due to lingering weakness in the industrial sector, a less favorable global backdrop and as geopolitical concerns hamper investment and exports. Risks to the outlook remain elevated and include rising global protectionism, slower-than-expected growth in China, a hard Brexit and other political concerns.

Japan
The domestic economy is expected to drive economic growth this year due to a relatively healthy job market, construction works related to the 2020 Tokyo Olympics and solid investment. Subdued global demand, however, is hurting Japan’s all-important external sector. Supplementary public spending should limit the negative spillovers of the October sales tax hike

Thank you Focus-Economics
September Major Economies Forecast

Cartoon by Dale Cummings, represented by Cagle Cartoons

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