US-China trade negotiations continue to dominate the global economy and markets. Areas of contention include tariffs, intellectual property and Chinese-led subsidies for the technology sector. Since Christmas, equity markets have rallied largely due to positive developments in the US-China trade talks. Donald Trump has stated that the US and China are, “very very close” to signing a trade agreement, adding that both nations, “are going to have a signing summit”. If there is a deal, markets will breathe a sigh of relief.
US economic slowdown
Although there have been positive developments in the US-China trade negotiations, the US economy is continuing to show signs of a slow down. The US economy created just 20,000 jobs in February. This was the lowest number of jobs created for 18 months and was well below market expectations of 180,000. The US services and manufacturing Purchasing Managers’ Index (PMI) has also dropped to its lowest level in 17 months.
UK – Brexit uncertainty
Over the long-term, developments in the global economy continue to drive the UK, however, since the 2016 European Union (EU) referendum; uncertainty over Brexit has played a prominent role.
With the UK scheduled to leave the EU on 29 March, there have been significant developments on the UK’s political landscape. To start with, two breakaway groups from the Labour and Conservative parties have formed an ‘independent’ Group. As a result of these defections, the Labour and Conservative parties have modified their Brexit polices. Labour is now supporting a second referendum, whilst the Conservatives agreed for Parliament to vote on motions on a ‘no deal’ Brexit and an extension to Article 50. As a result, Parliament has voted to reject the ‘no deal’ scenario, whilst voting to extend Article 50. However, these two parliamentary votes are not legally binding and, therefore, all options remain on the table.
The UK Parliament has also rejected Theresa May’s EU Withdrawal Agreement by 391 votes to 242. This was after concessions were secured from Brussels that failed to convince the Democratic Unionist Party (DUP) and European Research Group (ERG) to back the agreement. The outcome of the Brexit negotiations remain far from certain.
Despite the uncertainty surrounding Brexit, the UK economy showed unexpected strength in January, with UK Gross Domestic Product (GDP) rising 0.5%, after a sharp contraction in December. The technology and healthcare sectors showed strength, while car manufacturing and construction output were weaker. The annualised GDP growth rate sits at 1.4%, which is ahead of the Eurozone.
Between November and January, the number of people in employment was 32.7 million, a new record. Unemployment fell by 35,000 to 1.34 million, putting the rate at 3.9%, the first time the unemployment rate has been below 4% since 1975. Average weekly earnings, excluding bonuses, were estimated to have increased by 3.4%, before adjusting for inflation.
Chancellor, Phillip Hammond’s, Spring Statement revealed there has been an improvement in the UK’s financial position. The government is expected to borrow £22.8 billion this financial year to plug the gap between the money it spends on public services and the tax revenues it collects. This is almost £3 billion less than the £25.5 billion forecast in last October’s Budget. This should enable the government to provide a fiscal boost to the economy if required.
Eurozone economic slowdown
The trend of a global economic slowdown is being reflected in the Eurozone. This can be highlighted in the latest Eurozone services and manufacturing PMI data, which has been hit hard by weak global demand and political uncertainty. In February, the PMI for manufacturing hit its lowest level for 5 years. Output is now contracting for the first time since 2013. This is stoking up fears of a recession in the region.
The latest economic data for Germany is highlighting that its economy is slowing down. In January, industrial output declined 0.8%, which was below market expectations of a 0.5% rise.
The German government’s Council of Economic Experts has also cut their 2019 forecast for German GDP from 1.5% to 0.8%. The downgrade has been linked to a slowdown in the overall economy, with a cooling in the chemical and auto sectors partly to blame. The German Economic Experts are only forecasting a short downturn, as they are expecting a pick-up in 2020, with GDP forecasted to grow 1.7%.
In January, inflation in the Eurozone, as measured by the Consumer Prices Index (CPI) fell to 1.4% from 1.6%. Energy prices are pushing inflation lower, however, core inflation has risen slightly.
The European Central Bank (ECB) has responded to the Eurozone’s economic slowdown by reviving its stimulus plan, having brought it to a halt at the end of last year. The ECB will make a fresh offer of cheap loans to Eurozone banks.
China’s economic slowdown
The Chinese economy is experiencing an economic slowdown. Industrial output has slowed to 5.3% in the first two months of the year, which was below market expectations. This result provides a useful gauge of China’s manufacturing sector.
On the positive, fixed asset investments rose in the first two months of the year, up from 5.9% in 2018 and a little ahead of forecasts.
China is seeing weakness in exports, whilst seeing some stability in its domestic economy.
The global economy is continuing to slow, but on the positive, the US-China trade tensions appear to be subsiding. A lasting US-China trade agreement should support both the global economy and markets. A key policy of Donald Trump has been to reduce the US trade deficit, however, in 2018 the US trade deficit widened. This may toughen the US stance on trade and once the US has reached an agreement with China, there may be increased trade tensions elsewhere, possibly with the EU.