The U.S. and global economy should avoid a recession in 2020, with a combination of strong retail sales, potential monetary policy easing and service sector robustness expected to mitigate slowing growth, according to several leading economists.
A choppy week for global markets last week saw a substantial sell-off in equities, while the bond market spooked investors as the U.S. 10-year/2-year Treasury yield curve inverted, an event widely seen as a warning sign of recession.
Meanwhile, the German economy contracted while eurozone GDP (gross domestic product) growth halved to 0.2% for the second quarter.
However, underlying factors across major economies indicate that recession fears may be overblown, economists have suggested.
Over the weekend, German finance minister Olaf Scholz indicated that Europe’s largest economy would be willing to take fiscal measures if a recession loomed, shifting the government’s tone.
Meanwhile, the People’s Bank of China announced a program of interest rate reform aimed at stimulating an economy reeling from the impact of the trade war.
U.S. consumers to the rescue
Strong retail sales figures for July suggested that U.S. consumers are continuing to prop up the economy, partially offsetting the drag on business confidence from the U.S.-China trade conflict.
Sales climbed 0.7% month-on-month in July, a fifth successive increase, reiterating the American consumer’s role in providing lifeblood to the economy.
A note from UBS Global CIO Mark Haefele on Monday said this reinforces belief that the U.S. economy should avoid a recession. Assuming no trade war escalation, UBS has assigned just a 25% chance that the U.S. economy will contract for two consecutive quarters in 2020.
“But despite the strength of the consumer side of the U.S. economy, we do expect falling business activity to pull U.S. growth below trend, forcing the Fed to cut rates more than we had previously expected,” Haefele added.
However, latest data showed that factory output fell by 0.4% in July, while manufacturing output has now contracted in five of the past seven months, mirroring a broader slowdown worldwide led by China and Germany.
What’s more, a swift resolution to the trade war remains unlikely, Haefele suggested, meaning business investment will remain subdued globally, delaying an expected pick-up in growth which had been anticipated for the second half of 2018. UBS now expects U.S. economic growth of around 1.8%, below trend, in 2020.
“So, while we don’t believe a recession is looming, and we remain cautiously positive on global equities, we now expect a longer period of lower rates,” the note said, adding that UBS now expects the U.S. Federal Reserve to cut rates by 25 basis points three more times – in September, December and March.
Robust underlying factors
HSBC Global Asset Management has also played down the risk of recession, both stateside and globally, retaining a pro-risk stance in its multi-asset portfolios. Global co-CIO Joseph Little highlighted on Monday that equity markets have performed well year-to-date, despite this month’s sell-off.
He added that the “valuation gap between equities and relatively expensive bonds continues to increase,” but advocated a more cautious short-term approach given the downside risks to growth.
“The global economy is in a difficult place, but investor pessimism could be overdone. Looking at the growth outlook, US activity is being buttressed by a solid labor market,” Little said.
“Meanwhile, the recent weakness in euro zone data has been driven mainly by a large downturn in the industrial sector.”
While there is no clear indication of a turnaround here, the services sector remains robust, offsetting the impact of dwindling industrial performance.
Furthermore, muted global inflation trends have kept the door ajar for further monetary policy easing, and Little suggested that alongside an expected further Fed rate cut and a stimulus package from the European Central Bank (ECB) this year, fiscal policy could also play an increasingly important role.
For instance, the U.K. government has signaled a large program of spending and tax cuts, while Germany has now indicated that it is prepared to deploy fiscal stimulus should its economy continue to lag.
With regards to bond yields, which touched all-time lows across Europe last week, Little said there is no precedent for an inversion at such low government bond yields, but “yield curves have to invert further before they reach the levels that have preceded previous recessions.”
An inverted yield curve is generally considered a recession predictor. When short-term yields climb over longer-dated yields, it shows that borrowing costs in the shorter-term are more than the longer term. In these cases, businesses could find it more expensive to expand their operations. Meanwhile, consumer borrowing could also fall, thus leading to lesser consumer spending in the economy. All of these could lead to a subsequent contraction in the economy and a rise in unemployment.
New all-time highs for equities in 2020
While respecting the historical significance of the U.S. yield curve inversion in preceding recessions, J.P. Morgan equity strategists led by Mislav Matejka highlighted a number of variables which at present are inconsistent with such events.
“Typically, the curve inversion is a sign that real policy rates have become too high; lending conditions are tightening and banks are beginning to restrict access to credit; high yield credit spreads are worsening; and the labor market has started to deteriorate,” Matejka said in a note on Monday.
“This time around, high yield spreads are well behaved, real rates are not much above zero, and claims remain resilient.”
Matejka also highlighted that the yield differential between the U.S. and the rest of the world remains at near highs, which may be a factor impacting the U.S. yield curve slope.
“Put together, the curve inversion might be more an indicator of extreme market nervousness at present, of increasing central banks action, skewed bond ownership, and of global search for yield, rather than a sure sign that US is about to enter a recession,” he added.
As such, J.P. Morgan anticipates that equities will hit new all-time highs into the first half of 2020, though this development increases of a potential peak of the market for this cycle next summer.
USTR weighing 100% tariffs on new EU products including whiskies
U.S. Trade Representative Robert Lighthizer gestures as he speaks during a meeting at the Presidential Palace, in Mexico City, Mexico December 10, 2019.
Henry Romero | Reuters
The U.S. is weighing tariffs of up to 100% on European products the Trump administration previously absolved from such duties, targeting some of the euro zone’s most emblematic products, including Irish and Scotch whiskies and Cognac.
The U.S. Office of the United States Trade Representative on Thursday published a list of additional European goods it is now considering for the tariffs amid the fallout of its high-profile dispute with Airbus.
The USTR earlier this year published multiple lists of European goods worth more $10 billion that it had hoped to target in response to its beef with Airbus. In October, Washington moved ahead and imposed tariffs of 10% on large civil aircraft and 25% on agricultural goods bound from Europe.
Now the USTR is appearing to solicit advice on whether to hike rates on those goods up to 100% as well as add to its earlier list with some goods that the White House had excluded from its final October list. The new items, if added, could also be taxed at a rate up to 100%.
The items newly being considered for tariffs up to 100% range from Spanish olive oil and French cheese to German knives and Portuguese fish fillets. Among the myriad new products under consideration include European spirits like whiskey and Cognac.
The potential list “once again includes blended whiskies and Cognac … The fact that they had been excluded from the ‘final’ October list was a dodged bullet for Spirits companies back then. But now the threat is back,” wrote Bernstein analyst Trevor Stirling in a note to the brokerage’s clients.
“This is a full reshuffle – we are potentially seeing a rolling tariff, which we highlighted as a possibility two months ago,” Stirling added.
The U.S. has long argued that subsidies to Airbus hurt American aircraft giant Boeing and that the EU’s efforts to comply with prior WTO rulings against the subsidies aren’t enough to even the playing field.
But the complaint also represents a chapter in the White House’s broader campaign to reduce trade deficits. Starting with broad tariffs on imported steel and aluminum, the administration has sought to broker new, more advantageous trade pacts through the use of taxes and quotas.
Asked for comment on the new items, the USTR’s office referred CNBC to a prior statement.
“As a result of the EU’s failure to address these subsidies, on October 18, the United States imposed tariffs of 10 percent on large civil aircraft and 25 percent on agricultural and other products” from the EU, the USTR wrote on Dec. 2.
Due to the EU’s failure to curb the subsidies, “the United States is initiating a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs,” it added at the time.
Though Trump has seen some success with his protectionist tactics — notably in a new NAFTA agreement with Canada and Mexico — they’ve also angered economic partners around the globe.
In a separate matter, the U.S. government said last week that it might slap tariffs of up to 100% on $2.4 billion in imports from France after concluding that France’s new digital services tax would harm U.S. tech companies.
The administration’s ongoing negotiations with China are most emblematic of the president’s bargaining style with both Beijing and Washington angling for self-serving deals that don’t appear too lopsided in either direction.
The two sides reached a breakthrough in “phase one” discussions on Friday with the U.S. agreeing to cancel Sunday’s new round of tariffs and rolling back some other duties in exchange for Beijing’s purchases of American agricultural goods.
The deadline for public comments on the USTR’s new tariffs is Jan 13.
West Africa’s first large-scale wind farm starts generating power
A project described as West Africa’s “first ever utility-scale wind farm”, has started transmitting power to Senegal’s national electricity grid.
In an announcement Thursday, renewable power firm Lekela said that Parc Eolien Taiba N’Diaye (PETN) would produce electricity for Senegal across a period of 20 years.
While the 158.7 megawatt (MW) facility has started to export power, construction work is still ongoing and due to finish next year. Once it is fully built, PETN will use 46 wind turbines supplied by Danish firm Vestas.
Africa has huge untapped potential when it comes to renewable energy. According to the International Energy Agency (IEA) it is home to the “richest solar resources in the world” but has installed just 5 gigawatts of solar photovoltaics. This is less than 1% of the planet’s total, the IEA says.
In July 2019, Africa’s largest wind farm, the Lake Turkana Wind Power project, was officially inaugurated. The 310 MW facility was opened by President Uhuru Kenyatta of Kenya.
“We are pleased to note that Kenya is without doubt on course to be a global leader in renewable energy,” Kenyatta said in a speech given at the launch.
“This will not only ensure that our nation’s scenic beauty and unique ecosystems are preserved and protected for both present and future generations, but will also ensure that we become energy independent and that our energy supply will be safe as well as predictable,” he added.
The project is made up of 365 turbines, each having a capacity of 850 kilowatts. It is located 600 kilometers from Nairobi in the Loiyangalani District, Marsabit County.
Construction of the facility started in October 2014 and it began full commercial operations in March 2019.
Three words that got Boris Johnson the UK election victory he craved
Britain’s Prime Minister Boris Johnson speaks to supporters at the Copper Box Arena on December 11, 2019 in London, United Kingdom.
Leon Neal | Getty Images News | Getty Images
“Get Brexit Done.”
Three simple words that resonated with millions of people and propelled Boris Johnson into 10 Downing Street as a U.K. prime minister with a fresh term and a comfortable majority.
The brutal simple message was endlessly repeated by the Conservative Party to a frustrated public — tired of the endless arguing over the result of the 2016 EU referendum.
The Conservatives have 365 MPs (Members of Parliament) and an 80-seat majority over all the other parties combined when the new U.K. Parliament resumes. Labour, meanwhile, will occupy just 203 seats in the 650-strong Parliament, its worst return since 1935.
A Brexit election
The Conservative Party’s ruthless message was aligned to a strategy that sought votes from the millions of leave voters in the 2016 referendum. That meant reaching beyond the Tory heartland of southern England and looking to smash the Labour strongholds of Wales and England’s midlands and north.
If the Tories were clear and simplistic, then Labour’s message got lost in the fog. The opposition party had some initial success by refusing to commit to whether it supported Brexit or not, but ultimately voters tired of the indecision.
Labour leader Jeremy Corbyn eventually said he would negotiate a new deal and hold a second referendum, but then refused to declare who he would campaign for.
Voters interpreted that as a weak and confusing stance and on Thursday, Labour’s so-called “red wall” — a stronghold of seats across the country it has typically controlled — crumbled.
U.K. politics professor at the University of Essex, Paul Whiteley, told CNBC Friday that while Johnson isn’t popular by historical standards, he was still a lot more admired than Corbyn.
Whiteley said by phone that Labour’s Brexit position had offered a “terrible narrative in the context of a weary electorate.”
Cost of Corbyn
Party leader Jeremy Corbyn was emblematic of Labour’s apparent muddle.
Many viewed him as too left wing — a Marxist who would ruin the U.K. economy with plans to nationalize key industries. Others felt his political history showed improper sympathies with anti-Israeli groups as well as pro-IRA supporters in Ireland. That led to concerns over weakness on national security.
Labour leader Jeremy Corbyn attends the launch of the party’s election manifesto at Birmingham City University on November 21, 2019 in Birmingham, England.
Christopher Furlong | Getty Images News | Getty Images
Corbyn attempted to shift the U.K. election campaign away from the constitutional question of Brexit onto domestic matters such as the National Health Service and education.
But its manifesto, which included proposals to provide free internet and up spending on health care and education, was decried as too expensive by opponents. Again, Labour and Corbyn had failed to convince.
Labour has now not won an election since 2005, and only one of its leaders, Tony Blair, has won an election in more than 40 years.
Corbyn has announced he will now step down and the battle for control of Labour’s leadership and party direction will begin again.
A right-wing country?
Prior to the election, a right-of-center think tank claimed that for the Conservatives to win a majority they would need to target “Workington Man.”
This fictional stereotype voted for Brexit, was older, white and northern. It was decried as a rude stereotype but ultimately a total of 27 Labour-held seats in constituencies in the north of England fell to the Tories — including the real town of Workington.
According to data published by the polling company YouGov in August, 28% of Britons describe themselves as left-wing while 25% consider themselves right-wing. A further 19% place themselves in the center and the remaining 29% don’t know.
Whiteley said any idea that the U.K had become more right-wing was simplistic and that the electorate, especially in poorer areas, believed two things. First, that Johnson will deliver on improving the lives of people with better social support and employment prospects, and second, that he will deliver Brexit.
A disunited kingdom
The voting trends in England and Wales do not translate to the two other constituents of the United Kingdom — Scotland and Northern Ireland.
In Scotland, the Scottish National Party (SNP) now hold 48 of the 59 available seats north of the border. The SNP campaigned hard against Brexit after the 2016 referendum revealed only a third of Scots wanted to leave the European Union.
Scotland’s First Minister Nicola Sturgeon delivers a speech during a media conference at the Scotland House in Brussels as she is on a one day visit to meet with EU officials, on June 29, 2016.
Geoffroy Van Der Hasselt | AFP | Getty Images
The leader of the party, Nicola Sturgeon, said early Friday that the general election result reflects a desire in Scotland to choose its own destiny within Europe and the U.K.
It’s expected she will now put pressure on Johnson to accede to a fresh vote on Scottish independence. He is expected to resist, and enmity between the governments in Edinburgh and London will grow.
Whiteley said despite the SNP gains, the prospect of a second referendum now looks more remote as the ruling Conservative Party won’t entertain another vote.
“They are just going to turn down the SNP flat,” said Whiteley.
Northern Ireland was central to the debate over Brexit as lawmakers wrestled with how to maintain frictionless trade across the U.K. border with sits on the island of Ireland.
Following Thursday’s vote, and for the first time ever, nationalist parties now hold more seats than unionist parties. Irish unity will surely come to the fore as a topic and one poll in September showed a slight majority for Irish unification among people in Northern Ireland.
Whiteley claimed that while demographics were moving in the direction of Irish unity, many supporters want to wait for fear that rushing the process could herald a return to violence in Ireland.
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