A key development for the global economy and markets has been a change in policy by the US Federal Reserve (Fed). Although the Fed has left interest rates unchanged, which was expected, there was a more dovish tone to future rate rises. This prompted global stock markets to rise and the US Dollar to fall. The Fed Open Market Committee, “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support” a strong labour market and inflation at or near 2%. In January, US inflation, as measured by the Consumer Prices Index (CPI), remained unchanged for the third straight month and is under control, therefore, the market will be focusing on the health of the US economy, in order to determine when and at what pace the Fed will raise interest rates.
US government shutdown
It is clear that the US government shutdown has had an impact on the US economy. This can be illustrated by the US unemployment claims, which rose to the highest level since September 2017. Jobless claims jumped from a five decade low to 253,000. The 53,000 rise was the most since just after Hurricane Harvey struck Texas, in 2017. The US government shutdown has also delayed the announcement of the US gross domestic product (GDP) figures, which will now be released on 28 February.
US retail sales also showed some weakness, declining 1.2% in December, the largest decline since September 2009. At the same time, data for November was revised lower to show retail sales edging up 0.1%, instead of gaining 0.2% as previously reported. The US trade deficit with its global partners, fell in November for the first time, after increasing for five months in a row. The shortfall with China declined, by 11.5%.
The US/China trade talks have made some progress and, as a result, the US has postponed the planned increase in duties on Chinese products. However, the threat of a full-scale trade war has not gone away and remains in the background.
UK economic slowdown
The UK economy has continued to slow, with GDP, in the final in quarter of 2018, slowing to 0.2%, easing from 0.6% in the previous quarter. For 2018, as a whole, GDP growth was 1.4%, the lowest level since 2012. The strongest area of the economy was the services sector, growing 1.7%, whilst production and construction grew 0.7% and 0.6% respectively.
The UK manufacturing, construction and services purchasing managers index (PMI) confirmed these trends and revealed that activity had slipped to its weakest level for six years. The uncertainty regarding Brexit has forced companies to delay projects and investment and this is having a major impact on the economy.
The Bank of England has reduced its economic growth forecast for 2019 from 1.7% to 1.2%, blaming a slowing global economy and the uncertainty created by Brexit. The Bank of England Governor, Mark Carney, said there was a 25% chance of a recession this year. He urged MPs to resolve the Parliamentary stalemate on Brexit, which could create an “economic shock” at a time when China’s economy is slowing and trade tensions are rising. A Brexit solution was, “in the interests of everyone arguably everywhere”.
Although the UK economy is slowing, the level of employment has climbed to levels not seen since the early 1970s, with 32.6 million people in work between October and December 2018. Over the quarter, unemployment has fallen by 14,000 to 1.35 million. Average earnings increased at an annual rate of 3.4%, which is unchanged from the previous month, but well ahead of inflation. In January, inflation, as measured by CPI, declined to 1.8%, down from 2.1% in the previous month.
Eurozone economic slowdown
The Eurozone has also shown signs of economic weakness. During the fourth quarter of 2018, compared to the previous quarter, seasonally adjusted GDP in the Eurozone rose 0.2%. In the third quarter of 2018 GDP also grew 0.2%. This represents a marked slowdown from last year’s GDP numbers. Compared with the fourth quarter of the previous year, seasonally adjusted GDP in the Eurozone rose 1.2%.
The German economy is showing signs of weakness. In January, German manufacturing slipped unexpectedly into contraction, as the global slowdown hit the economy. In January, the IHS Markit manufacturing PMI dropped to 49.9, from 51.8 in December, its lowest level in more than 4 years.
Not surprisingly, the European Central Bank left interest rates in the Eurozone unchanged, but Governor, Mario Draghi, said that the risks surrounding the Eurozone’s economic growth had, “moved to the downside”, blaming geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility. He said interest rates were likely to remain at their present level through to the summer of 2019 at the earliest.
China is also showing signs of the global economic slowdown, with the manufacturing sector continuing its recent trend of contraction. This can be seen in the latest Caixin/Markit manufacturing PMI survey. In January, the private survey on China’s manufacturing sector came in at 48.3, the second consecutive month of contraction and the lowest reading since 2016.
The global economy is slowing down, but at this stage, the global economy is not entering a recession, however, one or two individual countries appear to be moving towards a recession, particularly in Europe. The risks to the global economy, including US/China trade tensions, remain in the background and are likely to resurface at some point in the near future. The big development has been a change in monetary policy by the US Fed. Given that US inflation remains under control, how fast the US Fed will raise interest rates will depend on the strength of the US economy. The market will pay special attention to the upcoming US economic data and the direction of the economy.