Markets were hit by a triple whammy of negative factors at the end of last week, which collectively crystalised fears about global growth. However, the week also saw policy announcements that showed policymakers are at least alert to the risks and in some cases ahead of them.
A disappointing US February jobs report capped off a week that was dominated by downward growth forecasts, weak economic data and policy announcements from some of the most important governments and central banks in the world.
China got ahead of the curve early in the week by lowering its official forecast for economic growth in 2019 to a range of between 6 per cent to 6.5 per cent, as exports as well as domestic demand show signs of deceleration. It also announced tax cuts aimed at boosting the manufacturing sector.
This was perhaps just as well as Chinese export data subsequently showed a huge 20.7 per cent year-on-year plunge in February, the biggest deterioration since 2016 and far exceeding the expected 4.8 per cent year-on-year drop. With markets concerned about the effects of trade tariffs on the second biggest economy of the world, they could not have had a worse illustration of the pain being felt.
However, trade data from the US also appeared to show that there are no winners from this dispute, with the US trade deficit increasing by 12.5 per cent in 2018 to reach US$621 billion, its highest since 2008, with the December deficit reaching a cycle-high $59.8bn. This is likely to result in a downward revision to US fourth quarter growth and see the external pressure on the economy continue into the first quarter of 2019.
Weakness in Eurozone data also saw the European Central Bank downgrade its growth forecast for the year from 1.7 per cent to 1.1 per cent, and also restore emergency stimulus measures. ECB president Mario Draghi not only confirmed another round of TLTRO (targeted longer-term refinancing operations)loans, but also pushed out the time frame for both rate hikes and a possible reduction of asset holdings. At the same time Mr Draghi was keen to stress that despite these measures the risks still remain tilted to the downside.
The Organisation for Economic Cooperation and Development downgrading its global growth forecast for the second time in less than four months was the perhaps the least surprising development of the week. But in some ways the weak US non-farm payrolls report on Friday, that dominated the weekend headlines, was probably the least ‘worst’ development of the week.
The 20,000 rise in non-farm payrolls in February did severely undershoot expectations, but there were special reasons behind this, including adverse weather effects, which are likely to unwind in March. Also with January payrolls revised surprisingly strongly to 311,000, the playing field is nothing like as bad as February’s headline suggests, with the three-month average standing at 186,000. Furthermore the unemployment rate dropped to 3.8 per cent from 4 per cent as the temporary effects of the January government shutdown unwound, and hourly earnings rose 0.4 per cent month-on-month. This demonstrated that wage inflation is occurring, taking the yearly rate of wage inflation up to 3.4 per cent from 3.1 per cent, the firmest pace since April 2009.
After all the negative headlines from last week, the coming week will see Brexit return to the centre stage, which will likely do little to settle the market’s nerves. Having failed to negotiate any meaningful changes to her Brexit deal with the EU, Prime Minister Theresa May likely faces another large defeat in the UK House of Commons this Tuesday.
As there is also no majority for a ‘no-deal’ Brexit, the likelihood is that the government will follow up this loss by requesting an extension to Article 50 of around two or three more months given that the March 29 Brexit deadline is now only a matter of days away.
A delay might sound superficially attractive to markets, but kicking the can down the road again will not solve the fundamental disagreements in parliament and may even make the political situation more unstable. After all it is by no means certain that more months of negotiations will result in anything different. Ultimately, it is the political instability that could create deeper fissures between the UK and the EU and within the British government, which may not even result in Brexit at all.
Tim Fox is chief economist and head of research at Emirates NBD
