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Macro Watch: will economic growth turn a corner in 2020?

Your guide to this week's big economic events 

Key points

  • An improved outlook means central banks are likely to stay on hold for now
  • Flash Purchasing Managers’ Index (PMI) readings will shed light on global growth
  • The unusual scenario of strong labour markets and sluggish inflation should persist

Central banks on hold

Improved growth prospects mean that central banks should keep policies on hold for now, but downside risks prevail and their stance will stay accommodative. The Bank of Japan refrained from providing substantial stimulus last year – even after the dovish turn of other central banks – and should leave policies on hold this week. The outlook has improved: trade tensions have receded and demand is improving, while the country seems to have weathered the recent consumption-tax rise better than in 2014.1 The European Central Bank (ECB) should also keep policies the same. A brighter outlook for external demand means that conditions have tentatively improved, while core inflation of 1.3% is the highest since April 2017. Long-term inflation expectations are still muted though, and the ECB Survey of Professional Forecasters will provide an update for survey-based measures this week. President Christine Lagarde has announced a strategy review, which means – barring unexpected developments – there will be no policy change over the next year. Finally, the People’s Bank of China will publish loan-prime rates which are likely to have been modestly affected by the 50bp cut to the reserve-requirement ratio earlier this year. The one-year loan-prime rate should fall from 4.15% to 4.1% this month.

The global economy: a cheerier picture

Survey data should confirm a cautiously positive outlook for this year, although trade-related uncertainty and geopolitical turmoil are likely to continue to provide headwinds. In particular, the January flash PMI readings for the US, the eurozone, Japan and the UK should indicate that growth will rebound somewhat in the first half of 2020. Last month, the global composite PMI rose to 51.7, the highest since April. But manufacturing activity is still sluggish: the global manufacturing PMI came in at 50.1 in December – consistent with stagnation – although this was an improvement from the third quarter. Meanwhile, South Korean GDP growth is expected to rise from 0.4% quarter-on-quarter in Q3 to 0.9% in Q4. This would make the year-on-year growth rate 2%, suggesting the economy has recovered from the disruption to international trade over the past 18 months. Import and export data for the first 20 days of January should also show that trade activity has continued to improve. In the Philippines, GDP growth is also expected to rise from 1.6% quarter-on-quarter to 1.9% in Q4, although annual growth should decline from 6.2% in 2018 to 5.9% last year.

Figure 1. Surveys suggest growth is picking up

Source: JP Morgan, Markit, as at January 2020

Tight labour markets and low inflation persist

Labour-market and inflation data should continue to cast doubt on the Phillips Curve: tight labour markets have not resulted in higher inflation. Structural factors – like the effect of technology on the jobs market – are probably the culprit. The UK unemployment rate should be unchanged at 3.8% in November, a multi-decade low, while wage inflation should stay above 3% (although it should continue to trend down). In Mexico, the unemployment rate should also be little changed at 3.5% in December, in line with the average for 2019 and slightly up from the 3.3% seen in 2018. Likewise, the Australian unemployment rate should be unchanged at 5.2% with 11,000 jobs added in December. Going forward, the bushfires should have a negative effect on output and the labour market. Meanwhile, South African consumer-price inflation should rise from 3.6% to 4%, comfortably within the central bank’s target of 3%-6%.  Similarly, the Bank of Canada’s preferred measure of core-inflation has strengthened in recent months and came in 2.2% in November – slightly above the central bank’s target – and should move sideways in December. Finally, Japanese core inflation should rise from 0.8% to 0.9% in December, boosted in recent months by the consumption-tax increase (underlying inflationary pressures are well contained).

Figure 2. Wage inflation in the UK is lower than the unemployment rate would suggest

Source: Refinitiv, as at January 2020. 

Other events we're watching 

  • US markets are closed on Monday for Martin Luther King Day.
  • The World Economic Forum starts in Davos.
  • The International Monetary Fund releases its World Economic Outlook

What we're reading right now

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Eliminating gender bias: how to improve corporate diversity

In this episode of Amplified, Saniye Gülser Corat, the Director of UNESCO’s Division for Gender Equality joins us to discuss the issue of gender bias in the digital space and how we can make corporate boards more diverse.

Central banks and climate change

There are a number of ways that central banks could help finance the climate transition, such as by using capital ratios to apply favourable regimes to green investments. But by reallocating resources, are central banks going beyond their mandate?

  1. 1The last Japanese consumption-tax increase was in 2014
  2. 2'Not in my back yards'

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