Weekly: Orderly slowdown

Backward looking data covering 3Q look rather weak, but PMIs and trade data suggest the worst of the global production and shipment cycle may be ending.
Taimur Baig, Nathan Chow01 Nov 2019
  • 2020 will see slow growth in the China and US, but the outturn will be no worse than in 2H2019
  • EM will likely fare better, aided by low interest rates, flat energy prices, and stable currencies
  • Monetary policy worldwide will maintain dovish biases…
  • …but market moving policy traction will likely come from fiscal and structural policies
Photo credit: AFP Photo

Slowing, but a trough in the making

From a sub 2% 3Q US growth outturn to minus 3% growth in Hong Kong, the narrative of the worldwide growth slowdown remains intact. But financial markets are not in the mood to fret, with equity and bond prices remaining in constructive territory. Words of an interim China-US trade deal, hard-Brexit being taken off the table, rate cuts by the Fed, and no inflation worries have kept sentiments constructive, although their durability can be questioned.

On the trade war front, we would expect the White House keen to see a pick-up in China’s purchase of agriculture products from the US. After all, despite the tariff war, the bilateral trade deficit has barely budged. Looking at data available through September, the ytd China-US trade balance stands at USD221bn, compared to USD 227bn last year during the same period, which should get the US to become more agreeable on the negotiating table, in our view.

Looking at mixed China PMI data and a surprisingly strong 3Q for Taiwan, we feel that the worst of Asian trade-related developments may be behind us. Electronics exports show signs of bottoming, especially when one examines leading indicators like semiconductor billing, which is presently suggesting that shipments are about the rise.

Against this backdrop, the latest Fed rate cut looks close to the terminal rate in this cycle, although we will be rash to ignore the downside risks. Our forecasts are for sub 2% growth in the US in both 2020 and 2021, although growth momentum may remain the same as that of 2H2019. There is a chance that the Fed would cut one more time in the first of half of 2020, considering the 100bps slowdown in nominal GDP growth rate, but largely we agree with the FOMC that the combination of around 2% growth and 2% inflation in the forecasting horizon is consistent with the present monetary policy stance.

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Nathan Chow


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