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Macro watch: China’s growth to slow; May to outline Brexit plan B; stage set for Davos

YOUR GUIDE TO THIS WEEK'S BIG ECONOMIC EVENTS

China’s economic slowdown is expected to continue, UK Prime Minister Theresa May will present her Brexit plan B to the House of Commons and the annual World Economic Forum will take place in Davos.

Consensus forecasts point to a continued slowdown in China’s economic growth in Q4 2018. This is supported by recent economic releases, including the country’s manufacturing Purchasing Managers Index (PMI), which fell into contractionary territory in December, and weak trade data. The annual rate of GDP growth is expected to slow to 6.3-6.4% in Q4, down from 6.5% in the previous quarter. That said, growth should stabilise at about 6% this year, as monetary and fiscal stimulus (deployed since mid-2018) will partially offset headwinds from past deleveraging efforts domestically and adverse external developments, such as the ongoing US-China trade spat. Accordingly, Chinese authorities are expected to revise their growth target down from about 6.5% last year to a range of 6-6.5%. Elsewhere, UK Prime Minister Theresa May will return to the House of Commons to outline how she plans to move forward after her Brexit plan was crushed in an historic defeat last week and her government survived a no-confidence vote. However, the debate and vote on May’s Brexit plan B will take place on Tuesday, 29 January. At present, it looks increasingly likely that the Brexit deadline will be extended beyond 29 March. Meanwhile, a no-deal Brexit seems unlikely, given the strength of parliamentary opposition to leaving the European Union (EU) with no deal. Our medium-term view is that the UK will eventually land not far from where it started – meaning it will manage to maintain close ties with the EU. But the process is likely to be drawn out and in the meantime, uncertainty will persist. In the US, financial markets will be closed in observance of Martin Luther King Jr. Day.

Japan’s adjusted trade balance should continue to deteriorate in December. In November, the country’s adjusted trade balance hit a four-year low of -$492bn, driven by waning export growth. This was probably a reflection of weaker external demand. Meanwhile, the recent appreciation of the Japanese yen also poses new challenges for export growth. Elsewhere, the World Economic Forum will return to the snowy mountains of Davos, with influential business, political and cultural leaders from across the globe in attendance. However, May, US President Donald Trump and French President Emmanuel Macron will skip this year’s gathering amid ongoing domestic political dramas. The main theme of this year’s summit is Globalisation 4.0: shaping a new architecture in the age of the fourth industrial revolution. In the UK, the unemployment rate should be roughly unchanged at 4.1% in November. Meanwhile, regular wage inflation moved rapidly higher last year, reaching 3.3% in October – a high for the current cycle.

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The Bank of Japan is likely to stick to its yield-curve control policy – which pins the 10-year yield at 0% – for the foreseeable future. Officials from the central bank have expressed concerns about the potential side effects of lower-for-longer interest rates on the banking system. However, negative developments in growth and inflation are likely to dominate their considerations. In 2018, growth slowed sharply, reflecting fading support from external demand. Inflation is running well below the central bank’s 2% target (the core measure has been stable at about 0.4% in 2018). In addition, the recent appreciation in the Japanese yen (it gained more than 4% against the US dollar) should provide some downward pressure on prices, if sustained.

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Markit will release the flash PMI January readings for the US and the eurozone, which will provide some insight on economic activity in early 2019. In December, the global composite PMI fell to 52.7, marking its lowest level since September 2016. We expect that the downward trend will persist, for now. In the US, the PMI surveys are likely to converge towards lower levels, having diverged markedly in 2018. Last month, the US composite index edged lower to 54.4, down from 54.7 in November. Meanwhile, consensus forecasts suggest that the eurozone composite PMI will be roughly unchanged compared to December, when it hit a four-year low of 51.1. Elsewhere, the European Central Bank (ECB) will hold its monetary policy meeting, which will focus on the outlook for growth. The ECB’s constructive but cautious outlook looks increasingly challenged, given recent economic developments. Core inflation averaged 1% last year, unchanged compared to its 2017 average. And although wage inflation has been encouraging, adverse developments in international demand and financial markets pose downside risks to the growth and inflation outlook. At this stage, we expect that the ECB will sound increasingly cautious. While policies should remain on autopilot for now (forward guidance points to lift-off in autumn), the ECB will stress that data will determine the timing and direction of its next moves.

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Consensus expectations suggest that the German Ifo Business Climate Index will edge lower to 100.9 in January, down from 101 in the previous month. The index trended down last year, in line with developments in other economic activity surveys, such as the PMIs. This suggests that special factors weren’t solely responsible for the country’s slowing growth: the Germany economy is exposed to developments in external demand, and the ongoing Chinese slowdown will likely continue to exert downward pressures this year. In the US, factory goods orders are expected to remain sluggish, having declined by 0.2% on a quarter-on-quarter annualised basis in November. However, as factory orders figures are produced by the Department of Commerce, they will not be released if the US government shutdown continues. At the time of writing, the backlog of economic releases was significant, spanning retail sales, trade and housing data.

CHART OF THE WEEK

OECD leading indicators signal broad-based economic weakness

Source: The Organisation for Economic Co-operation and Development as at January 2019.

The world’s biggest economies are showing signs of easing growth, according to the Organisation for Economic Co-operation and Development (OECD). The OECD’s composite leading indicators – gauges of economic activity that anticipate turning points for between six and nine months ahead – remained on a downward trend in November. In addition, the data confirmed that the US has joined the rest of the world in this downward trend. As such, it looks like synchronisation across major countries is reasserting itself, but in the wrong way, with US converging towards slower growth rates.


WHAT WE'RE READING RIGHT NOW

The actions taken by the ECB in the wake of the global financial crisis, China’s scientific proficiency and the relationship between household debt and real interest rates are among the interesting reads that you may have missed.

The ECB's performance during the crisis: lessons learned

A Vox column argues that interventions by the ECB are effective if they clearly signal a commitment to reinvigorating the economy and if they address the source rather than the symptom of financial stress.

Can China become a scientific superpower? 

According to The Economist, the hypothesis that scientific greatness requires freedom of thought is about to be tested.

A question of interest: is UK household debt sustainable? 

An analysis by Bank Underground, a blog by Bank of England staff, finds that household debt should be broadly sustainable under any rise in real interest rates of up to about two percentage points from current levels.

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