Over the last month, the global economy is continuing to expand, led by the US, whilst a number of political risks remain in the background, ready to pounce on the markets.
The main political event of the month, the US midterm elections, has had little impact with no surprises. The Democratic Party took control of the House of Representatives, whilst the Republican Party retained the Senate. This should have few implications in that a divided Congress typically means stability in policy.
After the excitement of the US midterm elections, the US economy is continuing to show signs of positive momentum, with third quarter Gross Domestic Product (GDP) growing 3.5%, on an annualised basis. The US economy is benefiting from strong consumer and government spending, however, exports were lower as the trade tariffs have begun to take effect.
US wages have also grown at their fastest pace for 9 years, increasing in October at an annual rate of 3.1%. The economy has added 250,000 jobs, which is just one of a number of indicators that have beaten market expectations this year. The jobless rate remains at 3.7%.
US corporate earnings continue to experience strong growth and in the third quarter of 2018, companies in the S&P 500 index saw their earnings grow 27%, when compared to the third quarter of 2017.
The US Federal Reserve has opted to keep interest rates unchanged in a range between 2% to 2.25%, but signalled that it wants to raise rates gradually towards 3% in the coming months. This signals that there should be one rate rise before the end of the year.
After intensive discussions, the UK and the EU have agreed a draft text of a Brexit agreement ‘at a technical level’. Although an agreement has been reached, it is far from certain that the Prime Minister, Theresa May, will succeed in achieving parliamentary approval and may now seek cross-party backing for the deal. Sterling rose on the news to just under €1.15 to £1, however, on realisation that getting the Bill through parliament remains a significant challenge, Sterling declined to €1.1227 to £1.
In the third quarter, UK GDP rose by 0.6%, having risen by 0.4% in the previous quarter. Although the growth rate was at its fastest pace since late 2016, there were signs of stagnation between August and September.
A Confederation of Business Industry (CBI) survey revealed that manufacturing new orders fell in the quarter to October at their fastest pace in 3-years, and this reflects declines in both domestic and export orders. Business optimism has also fallen at the fastest pace since the UK voted to leave the EU. The weakness in the UK economy is reflecting the uncertainty surrounding the outcome of the Brexit negotiations.
UK retail sales declined by 0.5% in October, which was due to the mild autumn that hit clothing sales. The slowdown in sales might just be down to the consumer keeping their ‘powder dry’ ahead of Black Friday. It is best to wait another month before making any conclusions.
On the positive, UK wages have grown at the fastest pace in nearly three months to September, rising 3.2%. Wage growth is ahead of inflation, as measured by the Consumer Prices Index (CPI), which rose 2.4% in the 12 months to October. The Chancellor, Philip Hammond, has stated that he expects this trend of wages being higher than inflation, to continue for the next 5 years.
Public sector net borrowing in September was £4.1 billion, which was £800 million less than in the same month last year. This has enabled Philip Hammond to announce in his Autumn Budget that austerity was “formerly coming to an end”.
Given the uncertainty with the UK economy, the Bank of England has left monetary policy unchanged.
In the third quarter, GDP growth in the Eurozone grew 0.2%, which is the slowest level for 4 years. Economists saw this latest economic data as further evidence of an easing of economic activity around the world. There are a number of reasons why growth in the Eurozone is losing momentum; these include the new emission standards for cars, together with fears of an escalation of a trade war.
The big political event in Germany was the announcement that Angela Merkel will be stepping down as German Chancellor in 2021. She has experienced poor election results and will not seek re-election as leader of the Christian Democratic Union of Germany party. The political announcement has had very little impact on markets or the economy.
Inflation, as measured by CPI, in the Eurozone, rose 2.2% in the 12 months to October. This is the fastest pace since December 2012. This rise was largely driven by higher energy prices and, as a result, the European Central Bank indicated that it would look through the headline figures, as the underlying price pressures remain weak.
Asia-Pacific Economic Cooperation (APEC) summit
For the first time, APEC has ended its summit without a formal Chairman’s statement, which will be released at a later date. This is due to US-China divisions over trade and their competing visions for the region. The US and China have not resolved their trade tensions and this continues to remain a cloud on the global economy.
There has been further evidence that the Chinese economy is slowing down. New bank loans in October were weaker, which suggests that economic stimulus is weaker. Although the Chinese economy is slowing, in October, there was a strong rise in exports, which beat expectations. Perhaps these upbeat figures are buyers ‘front-loading’ ahead of the next threatened round of tariff increases. Markets will have to wait to see the economic data in the New Year.
Despite the uncertainty in equity markets, the main economic trends remain the same in that the global economy is still growing, with the US economy showing positive momentum. Another positive is that although there are signs that the Chinese economy is slowing down, the annual growth rate remains above 6%. These positive trends should continue to support the global equity markets.
However, there are number of economic and political clouds that need to be monitored. There are signs of an economic divergence between the US and most of the other major developed economies, particularly the UK and the Eurozone, which are experiencing little if any positive economic momentum. There remain a number of political risks that could affect markets; the main political risk being a US-China trade war.