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Macro Watch: is the global economy in poor health?

Your guide to this week's big economic events 

Key points

  • Flash Purchasing Manager Index (PMI) readings should show the global economy is flagging
  • European Central Bank (ECB) President Mario Draghi presides over his last meeting
  • Norges Bank will probably stop raising interest rates after three hikes earlier this year

Economic growth should remain sluggish

Flash PMI readings for the US, the eurozone and Japan will shed light on the health of the world economy. The global composite PMI has hovered around 51.2 in recent months, the lowest since the middle of 2016 and consistent with anaemic growth. Global manufacturing activity improved slightly last month but is still contracting and may have started to spill over into the services sector. US and German data will probably also show a divergence between business and consumers. While US durable-goods orders could rise by 1.5% quarter-on-quarter, this would simply reverse the 1.2% contraction in Q2. Meanwhile, low initial jobless claims should indicate the labour market is strong. In Germany, the Ifo business survey is expected to remain well below its long-term average of 98, while the GfK consumer-confidence index should stay at relatively elevated levels. Monetary easing should start to take effect from early 2020, but trade tensions will continue to weigh on output.

Figure 1: Heading south

Source: Refinitiv, US Census Bureau, US Bureau of Economic Analysis, Institute of Supply Management, as at October 2019. 

Dovish central banks

Central banks across the world meet this week. While the European economy is struggling, the ECB is expected to keep policies on hold after it provided a significant – and controversial – easing package in September. This is Mario Draghi’s final meeting and he will likely reiterate the need for fiscal easing. Meanwhile, it is unclear whether or not the Turkish central bank will temporarily halt monetary easing. It cut interest rates at its last two meetings and there is still a chance it could do so again. But demand seems to be recovering and the depreciating lira could boost inflation. Consensus estimates are also split on whether Indonesia will cut interest rates again, after slashing them three times this summer, to 5%. Finally, Russia is expected to cut interest rates by 25bps to 6.75% in response to slowing economic growth. Inflation is currently at the central bank’s 4% target but is likely to fall in response to weaker demand.

Figure 2: Europe is undershooting the ECB's inflation target

Source: Bloomberg, European Central Bank, as at October 2019.

Scandinavia bucks the trend

The Norwegian central bank has hiked interest rates three times this year and is one of the few to retain a tightening bias. Norway’s economic performance has been solid, inflation is running above target and the impact of trade tensions looks limited. But this policy of ‘leaning against the wind’1 will be increasingly challenging amid trade tensions and the global easing environment. Because of this, the bank is likely to keep its policy rate unchanged for the foreseeable future. Like Norway, Sweden has also defied the global easing bias and has indicated that it will raise interest rates from negative territory towards the end of the year. Although economic activity has slowed, inflation is still under control and the central bank is likely to keep its guidance unchanged for the time being. Swedish household-lending data will also signal whether risks to financial stability have been building. Household-lending growth has moderated over the last two years and is running at about 5%.

Figure 3: Charging ahead

Source: Refinitiv, Eurostat, Statistics Sweden, as at October 2019.

Other events we're watching

  • Canadian federal elections. The incumbent Liberal Party is locked in a tight race with the Conservative Party, but neither are polling high enough to win a majority. If Prime Minister Justin Trudeau does stay in power, he will probably be reliant on the support of two smaller left-leaning parties.
  • Argentinian elections. Challenger candidate Alberto Fernandez of the Justicialist Party is likely to win the first round, eliminating the need for a second poll. Fernandez appears willing to adopt heterodox policies, but financial markets seem to have priced this in.
  • Brexit. The UK government will publish the Withdrawal Agreement bill – the legislation that puts the Brexit deal into law – this week. It remains to be seen whether Speaker John Bercow will allow a second meaningful vote on the deal, and an extension to Article 50 seems likely. 
  1. 1‘Leaning against the wind when credit bites back’, published by Norges Bank in September 2016.

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