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Macro Watch: will Chinese manufacturing turn a corner?

Your guide to this week's big economic events 

Key points

  • Chinese manufacturing activity will probably improve, boosted by policy stimulus
  • Purchasing Managers Index (PMI) surveys may point to a tentative uptick in growth for the first half of 2020
  • The Nordic central banks will continue to defy the dovish global trend

China: has the manufacturing sector hit the bottom?

Chinese growth has slowed over the last 18 months: GDP expanded by 6% year-on-year in the third quarter of 2019, down from 6.6% in 2018. The economy should grow by 6.2% this year according to official measures – within the government’s 6%-6.5% target – but may dip below 6% next year. But alternative sources suggest that underlying growth this year has been closer to 4%-4.5%. Trade tensions will continue to create headwinds in 2020, although targeted government stimulus could help offset this. The manufacturing sector has particularly suffered this year but may have bottomed out: in November, the official National Bureau of Statistics PMI moved above 50 for the first time since April, while the Markit/Caixin measure rose to 51.8, the highest since the end of 2016. This should be reflected in industrial-production growth, which is expected to rise from 4.7% to 5% in November. Meanwhile, fixed-asset investment should grow by 5.2%, boosted by policy support for infrastructure investment. Retail-sales growth should rise from 7.2% to 7.5%, although a weak labour market and high inflation should prevent a more sustained rebound.

Figure 1. Chinese growth on a downwards trajectory 

Source: China National Bureau of Statistics, Fathom, as at December 2019. 

Flash PMIs: tentative improvement 

Markit releases flash PMIs – the most timely and comprehensive indicator of global economic activity – for the US, the eurozone, Japan and the UK. In November, the global composite PMI rose to 51.5, a four-month high, while the manufacturing index moved above 50 for the first time since April. This improvement was common across most countries, with China and the US showing particularly strong momentum. This trend should continue and the December PMIs will likely point to a modest rebound in activity in the first half of 2020. Meanwhile, Germany’s Ifo business-climate survey should edge up from 95 to 95.5 in December, in line with the Ifo expectations component which has improved in recent months.

Figure 2. German business sentiment improves 

Source: German Federal Statistical Office, Ifo,, as at December 2019.

Central-bank meetings: who will buck the trend?

The Bank of Japan is set to keep its yield-curve-control policy unchanged, after it strengthened its forward guidance at its last meeting in response to downgraded growth and inflation outlooks. Monetary policy seems to have reached its limit – despite Governor Kuroda’s reassurance that more easing is possible – and fiscal stimulus should play a greater role going forward. The Bank of England should also keep its policy rate at 0.75%, after adopting a more dovish bias at its last meeting. Persistent Brexit-related uncertainty – unlikely to be resolved by the general election – and challenging external economic conditions mean it will likely maintain a cautious tone. Meanwhile, the Nordic central banks should stay hawkish. Sweden’s Riksbank has kept interest rates in negative territory since February 2015, but improved inflation and inflation expectations mean it should hike them by 25bps to 0%, while Norges Bank will probably keep rates at 1.5%, after raising them three times this year. Thailand and Indonesia’s central banks also meet and are expected to keep interest rates unchanged, while Mexico is set to cut rates by 25bps to 7.25%.

Figure 3. Stable Swedish inflation

Source: Kantar Sifo Prospera, Statistics Sweden, as at December 2019. 

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