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

Cagle Cartoons

US ECONOMY
Economic growth moderated in the second quarter as falling fixed investment and a weak external sector dragged on growth. Nevertheless, American consumers continued to buttress growth in Q2, with household spending rising robustly over the quarter, and this trend has likely continued into Q3. In July, retail sales were surprisingly strong, consumer confidence recovered and the jobs report highlighted a healthy labor market. That said, the manufacturing sector slowdown persisted in the same month, with the ISM index falling to a near three-year low, weighed on by waning external demand amid the ongoing trade dispute with China. With regards to the latter point, the recent escalation in trade tensions suggests a swift resolution to the trade war is highly unlikely, which will drag on growth ahead and could prompt the Federal Reserve to further loosen monetary policy.

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.

Inflation rose to 1.8% in July from 1.6% in June, signaling the trade war could be feeding into price pressures. Underlying inflation also edged up in the month. Inflationary pressures are expected to pick up slightly in the quarters ahead, on strong domestic demand and supply-side pressures due to tariffs.

At its meeting in July, the Fed cut its target range to 2.00%–2.25% but stressed it was a policy adjustment rather than the start of an easing cycle. Nevertheless, the recent escalation in trade tensions has prompted many of our panelists to pencil in another 25-basis-point rate cut at the 17-18 September FOMC meeting. FocusEconomics panelists expect the federal funds rate to end 2019 at 1.95% and 2020 at 1.77%.



TRADE RELATIONS
U.S.-China trade war heats up with new round of tit-for-tat tariffs Trade tensions escalated to unprecedented levels in recent weeks, with a fresh round of tit-for-tat tariffs from both the U.S and China increasing concerns that the over year-long trade war will persist beyond 2019. This will likely weigh on U.S. growth going forward. On 1 August, U.S. President Trump triggered an escalation in trade tensions when he abruptly announced that a 10% tariff would be slapped on the remaining USD 300 billion of imports from China not currently subject to tariffs. A few weeks later, Trump partially backed down by postponing some tariffs on a list of consumer goods from September to December, likely to ensure the tariffs would not dampen consumer spending—the mainstay of the economy—ahead of the critical Christmas buying season. The threat to impose tariffs on all remaining imports followed President Trump’s supposed dissatisfaction with the quantity of American agricultural goods that China was buying and the lack of progress being made in trade negotiations. On 23 August, China retaliated with its own tariffs ranging from 5% to 10% to be imposed on USD 75 billion worth of U.S. goods, and to be implemented in two phases matching the dates of Trump’s tariffs.

This followed the decision by the People’s Bank of China to allow the yuan to fall below the symbolic 7-yuan-per-dollar mark in early August, prompting the U.S. to label China a currency manipulator. The levies will specifically target goods including soybeans, crude oil and light aircraft, and China said it will also reinstate a 25% tariff on U.S cars and a corresponding 5% duty on auto parts in December. The retaliation thus clearly targets products linked to Trump’s core constituents in the industrial and agricultural belts, which are considered key swing states ahead of next year’s presidential election. As summarized by Iris Pang, greater China economist at ING, “it won’t have escaped the Chinese authorities’ attention that a full-blown trade war is unlikely to help President Trump’s chances in the election.” Hours later Trump announced a new set of countermeasures, stating the U.S. would raise the planned tariffs on USD 300 billion worth of Chinese goods that are scheduled to come into effect in September and December from 10% to 15%, while also increasing the existing tariffs on USD 250 billion worth of Chinese imports from 25% to 30% on 1 October.

Report from: FocusEconomics Consensus Forecast Major Economies

Cartoon by Pavel Constantin, Romania

Japanification is largely economist talk, but it means and affects a number of different things in daily American life.

One is an aging generational order. Here in the US the population is older and more and more adults are waiting to have children, often having smaller families. This is a trend in rich nations -  we have seen it before in Japan. However, this is not the only "Japan" related issue we are facing. The US and Europe have faced the similar issues with the EU showing stresses early in (perhaps Oct 2018) but the economy of the United States had largely remained resistant until August 2019. 

- Chad Hagan

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How Can You Measure The Japan Effect?

Economic growth in the form of the output gap
Inflation
A short-term cenbank interest rate
Demographic change


Commentary:

Germany’s bond market is now priced for endless stagnation. Its interest rates are negative on everything from overnight deposits to 30-year bonds. But it is striking how depressed bond yields are in countries with only a passing resemblance to Japan. A 30-year American Treasury yields just 2%, for instance. As currently scripted, Japanification is narrowly defined but broadly applied. It is the fear that policymakers have lost for good their ability to gin up the economy. A big question is whether the current situation is just one act in an unfolding drama, or where the story ends. - The Economist


The 'Japanese disease' Since the 1990s, Japan has been struggling with an extremely high public debt ratio and very low and even negative inflation and growth rates. Only in 2016 did Japan’s nominal GDP return to levels seen in 1997. Last year, Japan’s debt-to-GDP ratio stood at 238%, and since 1994, headline inflation has been negative for almost half of the time. This trend has also emerged in the eurozone in recent years. In Greece, the sovereign debt ratio rose to 183% following the European financial crisis, Spain was in a deflationary environment between 2014 and 2016, and Italy had to contend with predominantly negative growth rates between 2008 and 2013. - ING Bank


Cartoon by Luojie, China Daily, China

Russia’s Growth Deteriorates 

Growth seems to have recovered slightly in the second quarter, following a lackluster first-quarter performance which was dented by sliding investment activity and faltering exports. In Q2, economic activity picked up slightly on sturdier industrial production growth, which was underpinned by solid manufacturing output, and increased infrastructure spending under the government’s “national projects”. 

OPEC+ oil production restrictions and lower gas demand capped the increase, however. Meanwhile, although consumer demand metrics weakened, as suggested by retail sales growth decelerating to a two-year low in Q2, there were signs of improving conditions at the end of the quarter. Higher real wages in Q2 and a lower unemployment rate, which dropped to an all-time low in June, boded well for household consumption, which seemingly also benefited from gradually easing inflation thanks to a relatively strong ruble. 

Growth will sink this year, reflecting wavering household spending weighed on by the higher VAT rate, and a challenging external backdrop amid restricted oil output and weak gas demand. Looser fiscal and monetary policies should cushion the slowdown somewhat, however, while surging public infrastructure spending under the “national projects” should boost growth in 2020. FocusEconomics panelists see growth at 1.2% in 2019, which is down 0.2 percentage points from last month’s forecast. In 2020, GDP is seen increasing 1.8%.

Inflation fell to 4.7% in June (May: 5.1%), edging slightly closer to the Central Bank’s 4.0% target. Inflation receded faster than expected amid softer food inflation thanks to the early harvest in June and as consumer demand remained frail. A relatively strong ruble and soft consumer demand conditions should see inflation ease further in the second half of the year. Inflation is seen ending 2019 at 4.3% and 2020 at 3.9%.

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Much has happened this morning, so stay tuned for updates. 

The next Russia report will be out the end of August. 

Report from Focus Economics.

First off....China ->

China
Economic growth dipped to a 27-year low in the second quarter, and the economy likely continues to falter in Q3 amid the trade war with the U.S. Throughout January–July, investment growth slowed, while, in July, industrial production expanded at a near two-decade low and retail sales growth moderated. Meanwhile, in mid-August, the U.S. postponed imposing a 10% tariff on some Chinese consumer products from 1 September to 15 December, which should aid exports ahead of the Christmas season. In the same month, the IMF applauded the government during an Article IV visit for strengthening financial regulations, continuing to open up the economy and tightening control over local government expenditure to reduce the speed of debt accumulation; however, the Fund also noted that further reforms regarding state-owned enterprises are needed in order to increase competition and improve credit allocation.

Uncertainty linked to the trade war with the U.S. will continue to weigh on the economy, while weak global demand and domestic economic imbalances pose further risks to the outlook. Nevertheless, fiscal stimulus and accommodative monetary policy should buttress the economy and make the government’s 6.0–6.5% growth target for this year attainable. FocusEconomics panelists see the economy growing 6.2% in 2019, which is unchanged from last month’s forecast, before decelerating to 6.0% in 2020.

India
The economy looks set to gain traction in Q2 FY 2019, which runs from July to September. Rainfall in August and September, the final two months of the four-month monsoon season, is expected to be normal, which, coupled with above-average rainfall in July, should alleviate concerns in the agriculture sector following the dearth of rain in June. In addition, the private sector PMI rose to an eight-month high in July, mainly on the back of a rebound in the services sector. Looking back at Q1, the economy likely strengthened slightly thanks to faster annual industrial production growth, although the private sector PMI averaged notably lower than in Q4 FY 2018. Meanwhile, in politics, the government contentiously scrapped Jammu and Kashmir’s special status on 5 August, triggering civil unrest despite the government’s preemptive clampdown. In retaliation, Pakistan has suspended bilateral trade with India. • In FY 2019, the economy should maintain steady momentum, particularly if monsoon rains turn out to be normal. Fixed investment should benefit from greater policy certainty following the elections, in addition to lower interest rates. However, weak public finances, struggling non-bank financial lenders and a shaky global economy pose downside risks. Our panelists expect GDP growth of 6.8% in FY 2019, which is down 0.1 percentage points from last month’s estimate, and 7.1% in FY 2020.

FocusEconomics Consensus Forecast - East & South Asia

Japan’s machinery orders came in at +13.9% month over month for June, a swift turn from May’s -7.8%.

Forecasters called for a decline so the increased orders were a surprise. Also, real estate and insurance clicked in at double digit month over month growth. - Chad

*Charts from Goldman Sachs 

 

Despite the outpouring of positive sentiment the housing market is sputtering. Worries of a recession loom and geopolitical tensions are at an all time high. Don’t rush to refinance your mortgage too fast - another rate cut is in the cards.

From research: 

“The level of housing starts declined to 1,191k in July, below expectations, but details were firmer as single-family starts increased by 1.3%. Building permits increased by 8.4%, with an increase in both single-family and multi-family permits. Following the mixed report, we left our Q3 GDP tracking estimate unchanged on a rounded basis at +2.1% (qoq ar). We also left our past-quarter GDP tracking estimate for Q2 unchanged at +1.9% (compared to +2.1% as originally reported)” - Goldman Sachs 

If the long bond decline and other rate declines have you worried it may be worthwhile to read the below from Goldman Sachs:

• The historical correlation between yield curve inversion and recession is impressive. But what exactly is an inversion of, say, the 2s10s curve supposed to tell us? Roughly, an inversion indicates that the monetary policy stance is restrictive or is expected to become restrictive.
• This signal has worked well historically because US recessions have tended to follow overheating that led to restrictive policy. But it raises two problems. First, it is inconsistent: the decline in the term premium has dramatically changed the signal about the restrictiveness of policy. Second, it is narrow: recessions do not have to be preceded by restrictive monetary policy.
• This does not mean that the yield curve is useless for assessing recession risk. In our view, the “wisdom of the crowd” embodied in the yield curve can provide useful input on two questions. First, the near-term forward spread provides a sense of the market’s view of the economic outlook. Second, the market’s view of neutral helps us judge how far into restrictive territory we have gone. At the moment, however, neither measure indicates heightened recession risk. In gauging overheating risk, we think it is more straightforward to look directly at the economic data.
• We currently see moderate cause for concern: while price and wage pressures look contained for now, the US unemployment rate is headed to historically low levels.

Take the above and combine with with the fact that a large portion of of all business is an offshoot of businesses and supply chains for the top firms in the world, thereby controlling even more of the dynamics at play.

Estimates put 20% of all global trade controlled by the largest companies in the world. That number seems a bit small when you factor in joint ventures, ancillary businesses and subsidiaries. - CH

Soybean prices rallied to an over one-year high in mid-July before reversing all monthly gains by early August. On 2 August, soybeans traded at USD 829 cents per bushel, which was 1.7% lower than on the same day last month. Moreover, the price was down 0.7% on a year-to-date basis and was 2.8% lower than on the same day last year. Prices were initially buttressed by continued adverse weather conditions causing major delays in U.S. soybean planting. However, a 29 July USDA report showed that, while still lagging the 5-year average, soybean crop conditions have recently improved sharply on more favorable weather, causing prices to pare back gains. Moreover, prices steeply fell in the wake of the escalation of the U.S.-China trade war on 1 August.

FocusEconomics Consensus Forecast - Commodities