Preliminary figures revealed that GDP declined yet again on annual basis in the final quarter of 2019—leading to the first full-year economic slump since the 2009 crisis. Industrial-sector output contracted for the fifth quarter running, primarily due to the hammered construction and mining sectors, dragging down overall activity. Moreover, agricultural production cooled in the quarter and although activity in the services sector quickened, the increase was underwhelming, which alludes to softer-than-expected growth in household spending. Turning to 2020, available data suggests a gradually improving scenario. The manufacturing PMI rose in January, albeit remained in contractionary territory. Meanwhile, the services PMI returned to growth for the first time in nine months, which, coupled with strengthening consumer confidence, bodes well for consumption gaining traction.




The economy is expected to recover this year on the back of stronger consumer spending, buttressed by rising real wages and upbeat remittances. Increased effectiveness in executing public spending and investment should also support growth. Depressed business confidence, an uncertain global trade environment and the finances of debt-laden Pemex weigh on the outlook, however. FocusEconomics panelists estimate growth of 0.9% in 2020, which is down 0.1 percentage points from last month’s forecast, and 1.7% in 2021.




Inflation climbed to 3.2% in January (December 2019: 2.8%), thus landing slightly above the midpoint of Banxico’s target range of 2.0%–4.0%. Core inflation, meanwhile, has proved sticky, hovering at 3.5%–4.0% for nearly two years now. Inflation is expected to remain broadly steady going forward, though the sizeable minimum wage hike is an upside risk. FocusEconomics panelists see inflation ending 2020 at 3.4% and 2021 at 3.5%.




At its first meeting of the year on 13 February, Banxico axed the target rate by 25 basis points to 7.00%, coming in line with market expectations and marking the fifth consecutive cut. The decision was unanimous, and was motivated by contained headline inflation and increased economic slack. The vast majority of our panelists see Banxico further loosening policy this year. FocusEconomics analysts expect the target rate to end 2020 at 6.34% and 2021 at 6.04%.




The peso strengthened against the U.S. dollar and hit over one-year highs in recent weeks, buoyed in large part by the signing of the USMCA trade deal by President Trump. On 14 February, the MXN traded at 18.54 per USD, appreciating 1.3% month-on-month. The peso is expected to weaken somewhat ahead, while remaining vulnerable to episodes of volatility and risk aversion. Our panel projects the MXN to end 2020 at 19.65 per USD and 2021 at 19.95 per USD.

After an initial panic in financial markets, signs of stability have started to emerge. There's hope the coronavirus will be contained and that stimulus measures will mitigate the economic damage. But there's no question the outbreak will take a toll on global growth. In our new podcast, THINK aloud, ING’s Senior Editor Rebecca Byrne asks Rob Carnell, Head of Research and Chief Economist of the Asia-Pacific region, how he expects the situation to play out.

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Outlook Remains Stable
Growth slipped in the final quarter of 2019 as the French and Italian economies both unexpectedly contracted. More broadly, prolonged weakness in the bloc’s industrial sector amid weak external demand, coupled with policy uncertainties at home, have likely continued to constrain growth. Improved economic sentiment and a stable PMI in January, however, suggest momentum strengthened somewhat at the start of 2020. Meanwhile, in politics, Irish voters head to the polls; Slovenia’s Prime Minister resigned on disputes over healthcare funding; Austria’s conservative People’s Party struck an unprecedented coalition deal with the Greens; Pedro Sánchez was confirmed as Spain’s prime minister; and Italy’s ruling coalition seems to have dodged a government crisis. Moreover, the European Parliament backed Britain’s departure from the European Union, with negotiations now turning to trade talks.

This year, the economy looks set to remain stuck in a low gear. Foreign sales are poised to cool, due to mild global growth and an unsupportive external environment, which will also weigh heavily on investment activity and restrain the industrial recovery. On top of that, interventionist policies in Italy and Spain and trade tensions with the U.S. pose downside risks. Growth is seen at 1.0% in 2020, which is unchanged from last month’s forecast. In 2021, GDP is seen increasing 1.2%

The Eurozone economy slowed sharply in the final quarter of last year, after growth picked up in the third quarter. According to a preliminary estimate released by Eurostat, GDP increased a seasonally-adjusted 0.1% in Q4 from the previous quarter, following Q3’s 0.3% increase. The reading represents the weakest expansion since Q4 2013 and undershot market expectations of a 0.2% increase. Compared with the same quarter of the previous year, seasonally-adjusted GDP expanded 1.0% in Q4, below Q3’s 1.2% increase and marking the slowest growth rate since Q4 2013. Although no details behind the figure are yet available, prolonged weakness in the industrial sector amid global trade tensions, weak demand from key trading partners, and political uncertainty likely hit growth. Additional data showed that Italy’s unexpectedly contracted in Q4, while France’s economy also surprisingly shrunk due to widespread social protests. In contrast, the Spanish economy gained steam; however, a sharp contraction in capital spending and muted private consumption suggest the pick-up will turn out to be temporary. Looking ahead, the economy should gradually gain some strength this year. The manufacturing sector is expected to recover, while private spending will remain solid, benefiting from modest inflation, a relatively low unemployment level and favorable financing conditions. That said, the pace of expansion is expected to be sluggish nonetheless.

Labor market conditions in the common currency bloc improved in December, according to data released by Eurostat. The number of unemployed people decreased by 34,000, and the unemployment rate edged down from November’s 7.5% to 7.4% in December. The figure represents the lowest unemployment rate since May 2008. Looking at the countries with data available, five economies saw their unemployment rates inch down in December, including Spain and the Netherlands. In contrast, four economies saw their unemployment rates rise, while the rest of the bloc saw unchanged labor market conditions—including France, Germany and Italy. Despite a large overall improvement in the Eurozone over recent years, disparities in the labor market among core and periphery countries persist. Greece is the economy in the Eurozone with by far the highest unemployment rate (16.6%, data refers to October), followed by Spain (13.7%). At the other end of the spectrum, Germany (3.2%), the Netherlands (3.2%) and Malta (3.4%) have the lowest unemployment rates. FocusEconomics Consensus Forecast panelists expect the unemployment rate to average 7.5% in 2020, which is unchanged from last month’s forecast. For 2021, the panel expects the unemployment rate to also average 7.5%.


Analysis from Focus Economics

The more knowledge the better - Chaganomics

"The gap between corporates and investors on ESG related disclosures is as wide as ever. Investors are increasingly aligned around a desire to understand the company’s long-term value creation plan and receive credible, standardized information to support long-term risk assessments. But many corporates, even when they have a good story to tell and robust processes to manage ESG risk, are not giving investors the right information in the right format. A few straightforward steps could bring the two sides together." - PWC

Report: Mind The Gap, The continued divide between investors and corporates on ESG

ESG Guide @ Zermatt Credit Research, LLC

Here is an old report drudged up for a reread some twenty years later. - Chad

With the emergence around 1997 of a distinction between “new economy” stocks and the so-called “old economy” stocks, it has become necessary to take an additional dimension into account when monitoring stock markets.

Specifically, pricing new economy stocks raises three types of problems :

Definitions and measures are not straightforward;

The usual analytical frameworks show limits; 

The behaviour of investors and issuers is new.

BIS: https://www.bis.org/publ/cgfs19bdf4.pdf

Brazil Survey

What will be the impact of the pension reform?

Pension reform was approved last October, and includes measures such as raising the retirement age and increased workers’ pension contributions in a bid to save close to USD 200 billion over the next decade. The reform has undoubtedly provided a short-term boost to confidence, and raised expectations for progress on other reform fronts going forward. Moreover, the measures are an important step towards strengthening the public finances. However, the majority of panelists polled by FocusEconomics believe that the pension reform alone would not be enough to stabilize the public debt-to-GDP ratio—which, at close to 80%, is extremely high by emerging-market standards. The LatinFocus Consensus Forecast sees the public debt-toGDP ratio peaking in 2021 and declining marginally thereafter, suggesting panelists see further measures going forward to improve the fiscal outlook. “The approval of pension reform was essential to avoid the unsustainable rising trend of public debt. However, it is not enough to stabilize the public debt in the medium to long-run.” Mauricio Nakahodo, economist at Banco MUFG Brasil S.A. “Other measures are necessary to reduce the ratio.” Fernando Honorato Barbosa, chief economist at Banco Bradesco “[…] interest rate cuts were decisive to significantly improve the outlook for the public debt-to-GDP ratio as much as recent [political] developments were.” José Francisco Lima Gonçalves, chief economist at Banco Fator “The spending cap and the pension reform were the most important reforms [to reduce the debt burden]. The others are auxiliary, but not as fundamental as those were.” Sergio Vale, chief economist at MB Associados

Which further steps would reduce public debt?

Panelists frequently mentioned that fiscal and administrative reforms—particularly to address high mandatory expenditure— were key in order to complement the pension reform and put the public debt-to-GDP ratio on a firm downward path. In this regard, the fate of a package of measures presented to Congress in November—which includes the creation of a fiscal council, a fiscal emergency amendment enabling austerity measures, and changes to public-sector pay and conditions—will be important to watch. Most panelists do not see the package being implemented in full, however. “Brazil has roughly 90% of mandatory expenses in its annual budget, so the spending cap has been a burden on discretionary expenditure since 2017, especially public investment. To reduce the public debt/gdp more reforms targetting mandatory expenditure are required, such as: administrative reform and the fiscal emergency reform. The latter also include several measures to states and municipalities, that are also in fiscal difficulties.” Fernando Honorato Barbosa, chief economist at Banco Bradesco “Undoubtedly, administrative reform, which aims to reduce and control mandatory spending, is the biggest challenge and has the greatest weight on public accounts. In addition, tax reform would be of paramount importance to simplify the revenue side and improve the business environment.” Tarciso Gouveia, head of macroeconomic research at Petros.

What is the outlook for the reform agenda?

Panelists unanimously agreed that there will be some further progress on the government’s reform agenda, with tax reform the area mentioned most often by panelists. However, panelists were also clear that there were unlikely to be sweeping changes to the tax system, but rather more moderate tweaks, such as unifying federal taxes. Administrative reform to reduce the public wage burden was also mentioned frequently. However, this could be politically contentious, as demonstrated by the government’s decision to delay such a reform late last year for fear of public unrest. “A modest tax reform that focuses on simplification of some revenue streams appears possible, given strong support from Congressional leaders.” Jeffrey Lamoureux, head of country risk for the Americas at Fitch Solutions “The agenda is very complicated, but at least the value added tax should be somehow created.” José Francisco Lima Gonçalves, chief economist at Banco Fator.

“Both administrative and the fiscal emergency reforms have a significant approval probability, with some adjustments to the content – but should still have a positive effect on spending reduction over the next 10 years. We think a deep tax reform is unlikely, but the unification of federal taxes has significant probability of approval. Central Bank autonomy has a high probability of approval this year, as well as some privatizations.” Fernando Honorato Barbosa, chief economist at Banco Bradesco “In the case of administrative reform, it is more likely to be approved some reform focused on new public servants. And we expect a minor version of tax reform concentrated on the unification of a few federal taxes and some harmonization on the rates, and some changes to income tax.” Mauricio Nakahodo, economist at Banco MUFG Brasil S.A.

How will the 2020 budget impact the economy?

In December, Congress approved the 2020 budget. The government assumes GDP growth of 2.3% and inflation of 3.5%—both figures which are slightly above our panelists’ forecasts—and sets a primary deficit target of 1.6%. The panel had mixed views on the economic impact of the budget, ranging from contractionary to broadly neutral. “The 2020 budget is less restrictive than the previous years. The expenses are still restricted by the spending cap, but the restriction is smaller in the margin.” Fernando Honorato Barbosa, chief economist at Banco Bradesco “2020 will be another year of budget constraint due to the need for fiscal adjustment. This is a year of local elections and we might see some higher expenditures during the first half, but as compared to past election years, the situation is also tough at regional level meaning moderate expenditures.” Mauricio Nakahodo, economist at Banco MUFG Brasil S.A. “As we have been seeing lately, it will be a drag for economic growth”. Flávio Serrano, chief economist at Haitong “The public budget, while conservative, should make room for investment resources as fiscal dynamics improve, particularly with regard to the primary surplus that is expected to be much better in 2020.” Tarciso Gouveia, head of macroeconomic research at Petros “Moderate fiscal consolidation will be somewhat of a drag on aggregate demand. On the other hand, fiscal consolidation can be a positive driver for private confidence and, thus, investments. All in all, the effect should be roughly neutral.” Luis Suzigan, senior economist at LCA Consultores.

Will Brazil receive a rating upgrade this year?

Virtually all panelists expect Brazil to receive a credit rating upgrade this year in response to the improved fiscal and growth outlook. While some panelists see positive economic repercussions from an upgrade, others see no significant change, and some pointed out that the credit rating will remain below investment grade—an important threshold for decisively boosting capital inflows. “We should witness portfolio capital flows and a strengthening of the real (R$) in the short term.” Tarciso Gouveia, head of macroeconomic research at Petros “We think the BRL would strengthen against the USD [in the case of a rating upgrade], helping maintain the inflation rate at a low level, even under a solid rebound of economic activity.” Helcio Takeda, head of research at Pezco Economics “Very little [impact] – already priced into bond markets.” William Jackson, chief emerging markets economist at Capital Economics “Somewhat limited [impact], there’s a lot of uncertainty in the political and economic areas.” César Carrasquero, executive director of treasury & finance at Banesco “It will be positive, but not as positive as gaining back the investment grade, which we consider may happen only after 2022.” Sergio Vale, chief economist at MB Associados.

How will the stock market evolve in 2020?

In 2019, the Brazilian stock market reached an all-time high on investor optimism over economic reforms and lower interest rates. For 2020 panelists are broadly optimistic on the outlook for Brazilian stocks, with most seeing further price gains. “According to our scenario, we expect at least 16% [gains]. Alongside our macroeconomic scenario, there is still plenty of room for advancing multiples of companies. In addition, we should watch a new round of IPOs throughout 2020.” Tarciso Gouveia, head of macroeconomic research at Petros “[Stock prices should rise] linked to our expectation of more solid GDP growth this and next year.” Mauricio Nakahodo, economist at Banco MUFG Brasil S.A. “Most fundamental drivers of stock prices are already counted in. The low interest rates, less weak economic activity. Further relevant gains depend on inflows of capital. I don’t expect too much of this.” José Francisco Lima Gonçalves, chief economist at Banco Fator.

Focus Economics 

Focus Economics 

From John Kemp @ Reuters

U.K. REGIONAL EXPORTS: London generates more exports per capita than any other region of the United Kingdom: 

LONDON’s internal regional economy is so large, however, that exports are relatively less important than for any other region. Northern Ireland, Wales and the regions of northern England and the Midlands are the regions most dependent on exports as a share of their economies:

LONDON’s exports are somewhat more oriented towards the rest of the world. London sent just 49% of its exports to the EU in 2010. Northern Ireland and regions of northern England and Midlands all sent 60% or more of exports to the EU and were more heavily dependent on access to the Single Market:

What will we see in 2020*?

- Impeachment? Impeachment has become a tool for both parties to continue to dominate the airwaves and not get things done. Expect 2020 to be especially hard. Trump and the democrats will step up the fight, and so will the super PACs and state elections. Get ready for big money and dirty fighting, again. This is the new normal.

- Tariffs? China and the US will continue to fight. This for that, here and there. This is the new normal, again.

- Racism is on the rise, particularly anti-semitism. There are many reasons for this but, how can this happen in 2020? Western countries and citizens will stand up for Jews and take a stand against the onslaught of anti-semitism, but in some places it will remain. 

- We hate to group the continent together like this but so be it. South America is in trouble, again. Roughly 30% of the population on the continent want to leave for America. What does this mean? Deep discontent and very little room for poor policy. Unfortunately South America has quite a history of political upheaval.

- Technology changes? Expect one of the tech giants to be broken up and expect one or two to move into banking (hint - it’s not Libra).

* From Chad Hagan & Chaganomics

Below A Prediction List for 2020*:

More people will own a phone than have electricity.

London's "Stratford City" is fully built

China completes the world's largest rail system (120,000 km)

New Zealand's "Rebuilding of Christchurch" is fully built

Indonesian's "Sunda Strait Bridge" is fully built

Saudi Arabia's "Kingdom Tower" is fully built

Congo's "Great Inga Dam" is fully built

Scandinavia and Germany's "Fehmarn Belt Fixed Link" is fully built

China's "Great City" is fully built

Venera-D space probe to reaches Venus

Overwhelmingly Large Telescope (OWL) goes into operation

Giant Magellan Telescope goes into operation

World population forecasted to reach 7,758,156,000

Share of global car sales taken by autonomous vehicles equals 5 per cent

* Predictions from Quantumrun

Outlook improves.
Annual economic growth accelerated in the third quarter, powered by strong private consumption, government spending and a resilient external sector. However, the economy likely lost momentum in Q4. Industrial output fell in October and the manufacturing PMI for November remained in contractionary territory, pointing to weaker business activity. Moreover, tourism figures dipped in October—likely hit by China’s attempts to curb visits to the island—although remained strong for the year to date. More positively, external trade remains robust, with Taiwan benefiting from trade diversion from China due to the U.S.-China trade war. Meanwhile, Taiwan goes to the polls in early January to elect a new president and legislature, with China relations at the forefront of voters’ minds. The pro-independence DPP looks likely to retain the presidency, which could have detrimental effects on the external sector going forward. Next year, economic growth is expected to slow slightly, in part due to waning growth in mainland China and the U.S., although trade diversion from China should support the economy. Tense relations with the mainland pose a downside risk to the outlook. FocusEconomics panelists forecast GDP growth of 2.1% in 2020, which is up 0.1 percentage points from last month’s forecast, and 2.2% in 2021.

Politics
On 11 January 2020, the Taiwanese electorate will head to the polls to elect a new president and legislative assembly, with cross-strait relations and events in Hong Kong at the forefront of voters’ minds. Incumbent Tsai Ing-wen of the independence-leaning Democratic Progressive Party (DPP) looks likely to retain her hold on the presidency, with recent polls indicating a widening lead over the Kuomintang (KMT), the China-friendly opposition party. This should mean a broad continuation of past policies. Measures such as Invest Taiwan—which aims to attract overseas investment via cheap loans and preferential tax rates—look likely to continue supporting growth and the labor market. Meanwhile, on the fiscal front, planned increases in infrastructure spending should benefit imports and fixed investment. That said, a continued push to reduce dependence on mainland China could affect the external sector somewhat owing to a potential economic backlash from authorities in Beijing. On this point, analysts at Goldman Sachs note: “Another macroeconomic implication in the event President Tsai wins a second term is potential headwinds to services exports, particularly tourism. Amid heightened crossstrait tensions, inbound Chinese tourism declined after her 2016 election. That said, the downside risk may be limited, given an already lowered share of mainland Chinese visitors within the total visitor arrivals.” If the KMT candidate Han Kuo-yu were to confound market expectations and win the presidential elections, this would likely lead to closer ties to China, potentially aiding the external and tourism sectors in the short-term. The KMT is also proposing to reduce infrastructure investment, which would likely dampen imports and fixed investment levels, while boosting government spending somewhat. Meanwhile, the race for all 113 seats of the legislature looks less clear cut, with the emergence of the Taiwan People’s Party likely to deny either the DPP or KMT a parliamentary majority. As such, even if the DPP wins the presidential race as predicted, the loss of its present majority could entail increased resistance to its attempts to pass proposed policies into law. Our panelists project that GDP will grow 2.1% in 2020, which is up 0.1 percentage points from last month’s estimate but down from the 2.6% growth averaged during President Tsai’s first term in office to date. In 2021, our panel sees GDP growth of 2.2%.

PMI Remains Depressed
The manufacturing Purchasing Managers’ Index (PMI), reported by IHS Markit, remained unchanged at 49.8 in November, once again coming in below the 50-threshold that signals deteriorating operating conditions in the manufacturing sector. The amount of new work received by manufacturers decreased in November for the 15th consecutive month. This came against the backdrop of weak customer demand weighing on both domestic and external sales, with production falling as a result. Furthermore, purchasing activity and backlogs declined, while employment figures were unchanged, putting an end to a fourmonth-long period of expansion. Regarding prices, output prices fell again in November, despite an increase in input costs. Annabel Fiddes, principal economist at IHS Markit, commented: “Businesses remain particularly vulnerable to a slowdown across the global economy. Data highlighted a solid decline in export sales amid reports of weaker demand across key markets like China, Japan, Europe and the US. The latest survey also suggests that this soft patch may extend into 2020 unless there is a meaningful pick-up in client demand.” FocusEconomics Consensus Forecast panelists expect fixed investment to expand 3.0% in 2020, which is down 0.1 percentage points from last month’s forecast. For 2021, participants expect fixed investment to increase 3.1%.

Industrial Production In Doldrums
Industrial output declined 2.9% in October compared to the same month a year earlier, sharper than the 0.7% decrease in September (previously reported: -0.8% year-on-year). The downturn in October was driven by a steeper fall in output in the manufacturing sector, which represents more than 90% of total industrial production. Moreover, a plunge in mining and quarrying output weighed on industrial output in October. More positively, however, output in the water supply sector increased for the second consecutive month in October. On a seasonally-adjusted month-on-month basis, industrial output flatlined in October, following a 2.2% drop in September. Annual average growth in industrial production, meanwhile, fell 0.8% in October, contrasting a 0.1% increase in September. FocusEconomics Consensus Forecast panelists expect industrial production to expand 1.5% in 2020, which is down 0.8 percentage points from last month’s forecast. For 2021, participants expect industrial output to grow 3.2%.


Exports and Imports Rebound
Merchandise exports increased 3.3% in November in annual terms, contrasting October’s 1.5% contraction. The rebound came amid a strong increase in ICT exports, although falling exports of metals, machinery, plastics and rubber moderated the overall reading. Exports to the U.S. continued to surge—up almost 17% this month after October’s near-18% increase—with year-todate results also showing the increased importance of the U.S. as a trading partner, likely linked to trade diversion from China. However, export orders— which typically lead actual exports by two to three months—decreased 3.5% in October, the latest month for which data is available, suggesting softer export momentum ahead. Meanwhile, merchandise imports rose 5.8% in November, contrasting the 4.1% decrease in October. The increase was primarily driven by a surge in machinery imports, which outweighed falling imports of electronic, mineral and chemical products. The trade surplus was USD 4.3 billion in November, down from the USD 4.7 billion figure observed in November 2018, but nonetheless up from the USD 4.0 billion surplus in the previous month. The 12-month trailing trade surplus decreased to USD 45.7 billion in November from USD 46.1 billion in October. Our panelists forecast that exports will expand 3.2% in 2020 and imports will rise 3.8%, bringing the trade surplus to USD 56.1 billion. In 2021, our panel expects exports will expand 0.8%, while imports will rise 1.0%, bringing down the trade surplus to USD 55.9 billion.

The outlook remains stable.
Available economic indicators show growth momentum remains weak. Industrial production was subdued in October, as the trade war with the U.S eroded manufacturing activities. This trend is expected to continue in the coming months as corroborated by a new drop in exports in November. Moreover, mounting economic uncertainty is postponing investment plans, especially among foreign firms. The main silver lining has been the rebound in the manufacturing PMI in November. Meanwhile, on 13 December, President Trump agreed to a limited trade deal with China, effectively barring a fresh round of tariffs due on 15 December. As part of the deal, U.S. officials stated that China will purchase more U.S. agricultural products, while the U.S. will remove some existing tariffs in return. At the time of writing, however, Chinese authorities have not yet confirmed whether the two sides have reached an agreement.

Next year, the economy will continue to moderate amid a long-lasting trade rift with the United States. Moreover, the property sector is expected to suffer from tight financing, which will weigh on overall economic growth. Although supportive fiscal and monetary policies are expected to cushion the slowdown, the scale of the measures will be limited. FocusEconomics panelists see the economy growing 5.9% in 2020, which is unchanged from last month’s forecast, before decelerating to 5.7% in 2021. Inflation soared from October’s 3.8% to 4.5% in November, a near eight-year high. The African swine fever outbreak continues to push up prices not only for pork but also for substitute products such as beef and lamb. Conversely, non-food inflation remains subdued, reflecting weak economic growth. Looking forward, inflation will inch down on this year’s high base effect. FocusEconomics panelists forecast that inflation will average 2.7% in 2020, which is up 0.2 percentage points from last month’s estimate, and 2.3% in 2021.

On 18 November, the Central Bank slashed its seven-day reserve repo rate by 5 basis points (bp) to 2.50%, while, on 20 November, the Bank cut the one-year loan prime rate by 5 bp to 4.15%. These actions followed a similar move with the medium-term lending facility on 5 November, and should lower borrowing costs especially for small-to-medium-sized firms. Panelists project the one-year deposit and lending rates to close 2020 at 1.48% and 4.33%, respectively, and 2021 at 1.50% and 4.35%.

Lack of tangible progress on a potential trade deal between China and the United States weighed on the yuan in recent weeks. On 11 December, the yuan traded at 7.04 CNY per USD, a marginal 0.4% month-on-month depreciation. President Trump’s erratic foreign trade policies and a challenging domestic economy will determine the evolution of the yuan further down the road. Our panelists see the yuan ending 2020 at 7.12 CNY per USD and 2021 at 7.07 CNY per USD.

PMI & Beyond
The manufacturing Purchasing Managers’ Index (PMI) published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) rose from 49.3% in October to November’s 50.2%. The print was above the 49.5% result expected by market analysts. As a result, the index sits above the 50.0% threshold that separates contraction from expansion in the manufacturing sector for the first time in seven months. November’s improvement reflected a sharp turnaround in new orders, along with stronger growth in the production index. While robust demand boosted suppliers’ delivery times and purchasing activity, job creation was unchanged. Despite remaining well below the 50.0% threshold, export orders gained some ground in November, likely reflecting hopes of a trade agreement between China and the United States. Input prices—a reliable leading indicator for inflation—receded further in the same month. Against this backdrop, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, comment that: “The blip of a rise in the official manufacturing PMI certainly looks positive for markets, but we do not think such a rebound suggests a bottoming out of the economy, as strong growth headwinds remain, especially from the cooling property sector and China’s worsening fiscal situation. […] We do not think Beijing will overreact to this reading, as it has already learned the lessons from spring this year when some headline data pointed to a recovery. Amid a deteriorating growth outlook, Beijing will likely to roll out more easing measures despite limited policy room.” Panelists expect GDP to expand 5.9% in 2020, which is unchanged from last month’s estimate. In 2021, the panel foresees lower economic growth of 5.7%.

Industrial Production
Industrial production increased 4.7% year-on-year in October, sharply down from September’s 5.8% expansion and undershooting analysts’ expectations of a 5.4% rise. The reading was led by sizeable decelerations in mining and manufacturing output. The energy sector, however, posted an acceleration in the same month. On a month-on-month seasonally-adjusted terms basis, industrial production increased 0.17% in October, down from the 0.71% expansion in September. Annual average growth in industrial production, meanwhile, inched down from 5.7% in September to 5.6% in October. Against this backdrop, Iris Pang, Greater China economist at ING, comments that: “Industrial production of vehicles (-11.1%YoY) and smartphones (-7.3%YoY) show how the trade war has affected exports as well as local demand. Vehicles and smartphones share two similar features; they are both expensive and demand for new models from consumers is low without an obvious reason to upgrade. As demand is weak, production shrinks as inventory must be sold. It’s not all bad though. Production of integrated circuits grew 23.5%YoY in October and we expect this to remain strong due to the production of 5G parts and products.”

Investment Growth Falls To Record Low
Nominal urban fixed asset investment expanded 5.2% year-to-date in October, below the 5.4% increase in January–September. The reading undershot market expectations of a 5.4% rise and represented the lowest print since the data started in 1998. The reading reflected a slowdown in growth in the tertiary sector as well as a sharper decline in the primary sector. The secondary sector, however, posted an acceleration in the same period. Meanwhile, property investment growth slowed slightly to 10.3%, the lowest rate since the start of the year. In terms of ownership, investment growth in fixed assets of state-owned enterprises accelerated in January-October, while the expansion in investment among private companies softened to a nearly three-year low in the same period. On a month-on-month basis, investment in urban fixed assets rose a seasonally-adjusted 0.40% in October, marginally down from the 0.42% expansion in September. Yi David Wang, head of China economics at Credit Suisse, noted that: “Looking ahead, domestic demand indicators will likely remain tame over the next couple of months. However, we maintain the view that an inflection point to underlying growth momentum will likely occur by December/January in light of our outlook for more supportive policies to come in 2020.”

Exports Contract For Fourth Consecutive Month
In November, exports fell 1.1% over the same month last year, coming in below the 0.8% drop in October. Moreover, the print marked the fourth contraction in a row and contrasted the 0.8% rise that market analysts had expected. Meanwhile, imports rose 0.3% in annual terms in November, contrasting the 6.2% contraction in October and marking the first positive reading in seven months. Moreover, the print was above the 1.4% decline that market analysts had projected. As a result of the expansion in imports, the trade surplus fell to USD 38.7 billion in November 2019 from USD 41.9 billion in November 2018 (October 2019: USD 42.5 billion surplus). The 12-month moving sum of the trade surplus fell to USD 434 billion from USD 438 billion in October. Our panelists forecast that exports will expand 1.5% in 2020 and imports will rise 2.6%, bringing the trade surplus to USD 393 billion. In 2021, FocusEconomics panelists expect exports will expand 2.9%, while imports will rise 3.7%, leaving the trade surplus at USD 388 billion.

Economics Realities of China's Global Influence from chaganomics