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Flash PMIs; Draghi’s testimony; global trade volumes to fall


Purchasing Managers’ Index (PMI) readings should remain at low levels in September, President of the European Central Bank (ECB) Mario Draghi testifies to the European Parliament for the last time and global trade growth will probably decline again.  

Spain is set to dissolve parliament and call for elections after the Socialist party failed to form a government. Polls will likely be held in November, although they will probably yield a similar result to the April elections where the Socialist party won a relative majority. We eventually expect a Socialist-led centre-left government to form, although a right-wing majority cannot be ruled out – particularly if the parties run as one entity. Looking to economic indicators, Markit will release flash PMI readings for September. In August, the global composite PMI fell from 51.6 to 51.3, largely reversing the modest improvement recorded in July. At a country level, slightly higher scores in the eurozone, China and Japan were offset by sharp deterioration in the US. Overall, the global economy remains anaemic and surveys suggest that US growth is converging with other slowing economies. The manufacturing industry is flirting with contraction and there are signs of a negative spill-over into the services sector. PMIs are likely to move sideways in September, reflecting the conflicting impact of persistent trade-related tensions and monetary-policy easing. Meanwhile, South Korea reports trade data for the first 20 days of September – one of the earliest available indicators of global trade trends. Last month, exports contracted by 13.6% year-on-year, while the rate of decline for imports fell from 2.7% to 4.2%. Elsewhere, Draghi will testify to the European Parliament. This will be Draghi’s final report to the European Parliament’s Committee on Economic and Monetary Affairs before his term ends on 31 October. Draghi will probably offer updated views on the economic outlook and monetary policy for the bloc, while he will likely be asked to provide details on the ECB’s latest easing package. Across the Atlantic, John Williams, President of the New York Federal Reserve (NY Fed) will speak at the Treasury Markets Conference. Onlookers will focus on any remarks about the recent liquidity squeeze in US money markets which forced the NY Fed to intervene.

Germany releases its IFO business survey, which has deteriorated sharply since the middle of 2018. The index came in at 94.3 in August, the lowest since November 2012 and well below its long-term average of 98. Consensus estimates expect the metric to be little changed at 94.6 in September. In Hungary, the central bank meets and is expected to keep interest rates unchanged at 0.9%. Meanwhile, ECB policymaker Francois Villeroy – who is head of France’s central bank – will speak at the Paris School of Economics. The speech will attract attention in light of reports that Villeroy was part of the Governing Council’s minority that opposed the ECB’s decision to resume net asset purchases. In New York, the United Nations’ high-level General Debate kicks off. European Council President Donald Tusk and UK Prime Minister Boris Johnson will attend and are due to hold talks on the sidelines. With just over a month to go before the 31 October Brexit deadline, the meeting will be closely scrutinised for any sign that a deal could be reached. 

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The New Zealand central bank meets and is expected to keep interest rates unchanged at 1%, having cut them by 50bps – more than expected – in August. The Thai central bank is also likely to keep interest rates the same at 1.5%, after slashing them by 25bps last month. Meanwhile, global trade data is released. World trade volumes fell by 1.4% month-on-month in June, following an upwards-revised 0.6% rise in May, while they contracted by 3% on a quarterly annualised basis in Q2 – the third consecutive fall. Trade-volume growth is now slightly negative on a year-on-year basis, after coming in at about 5% in 2017 and early 2018. Surveys suggest this downward trend is likely to continue. The export-orders component of the global manufacturing PMI – which leads hard data by about two quarters – has been contracting since last September and fell to 47.5 in August, the lowest since October 2012. Trade-related uncertainty is almost certainly behind this.

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The eurozone reports M3 money and lending data. Growth of bank lending to the private sector has been roughly stable at about 3% year-on-year since the middle of 2018 – it came in at 3.2% in June, little changed from the month before. The new ECB easing measures will probably only have a marginally positive impact on lending, given that policy uncertainty will probably have a negative effect on investment decisions. Separately, the ECB’s economic bulletin will provide a detailed description of the eurozone’s economic and financial conditions. Meanwhile, the Philippine central bank meets and will probably cut interest rates by 25bps to 4%. Elsewhere, the US releases the third second-quarter GDP reading, along with trade data. Q2 GDP growth is expected to be confirmed at about 2% quarter-on-quarter, likely showing that consumption – which expanded by 4.7% according to the second release – was the main driver. By contrast, inventories and net trade probably made significantly negative contributions. The US trade deficit for goods is expected to be $74bn in August, little changed from July. But on a 12-month rolling basis the metric came in at $886bn in July, up from $832bn a year earlier. Meanwhile, the Mexican central bank is expected to cut interest rates by 25bps to 7.75% for the second time this year. Elsewhere, Draghi, the Bank of England’s Governor Mark Carney and deputy Jon Cunliffe will speak in Frankfurt at the fourth European Systemic Risk Board annual conference.  

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In the UK, GfK will release its consumer-sentiment index. Consensus estimates expect the metric to be unchanged at -14, at the lower end of the -14 to -10 range that has prevailed since the start of 2019. The index is below its long-term average of -9 and reflects a divergence between positive sentiment about personal finances – reflecting a solid labour market – and growing pessimism about the general economy, which is probably down to Brexit-related and international uncertainty. Meanwhile, China reports industrial profits. Growth has been volatile recently: industrial production contracted by 3.1% year-on-year in June, then grew by 2.6% in July. But looking beyond month-to-month disparities, industrial-profit growth has been sluggish this year. By contrast, industrial profits grew by an average of 10% last year and 17% in 2017. Higher tariffs on exports to the US partly explain this and will probably continue to have an impact going forward. Elsewhere, the European Economic Sentiment Index (ESI) is released. The ESI has trended down since the start of last year, reflecting deteriorating economic conditions. But it showed some tentative signs of stabilisation last month, which is expected to continue – consensus estimates think the index will come in at 103, only slightly lower than September’s reading of 103.1. The manufacturing industry is still underperforming the services sector – a recurrent pattern across major economies – but there are now some signs of a negative spill-over. Meanwhile, the US releases personal-consumption-expenditures (PCE) inflation. Recent indications from consumer-price and producer-price inflation suggest that the core PCE deflator – the Federal Reserve’s (Fed’s) favourite gauge of underlying inflation – will increase from 1.6% to 1.7%, still well below the Fed’s 2% target.


Core inflation is running below the target set by major economies

Source: Refinitiv, as at September 2019. Based on national sources. 

Despite extraordinary efforts by central banks over the last decade, core inflation (which usually excludes energy and food) is still running below the 2% target that most developed economies have in place. Looking beyond some special factors that temporarily boosted prices – the 2014 consumption-tax rise in Japan and sterling depreciation following the EU referendum – core inflation has shown little improvement, despite evidence that output gaps are closing. This suggests an apparent failure of the Phillips Curve framework, or the traditional relationship between slack in the labour market and prices. It is likely that structural factors like technological innovation have created changes in labour and product markets, resulting in restrained wages and lower prices.


Non-tariff barriers and protectionism, living with deflation and the prospect of lower economic growth are among some of the interesting reads you may have missed.

Global trade protection and the role of non‑tariff barriers

Trade tariffs have become increasingly prevalent over the past three years. But a Vox blog post argues that protectionism in the guise of non-tariff barriers started much earlier. In fact, the majority of protectionist interventions from 2009-17 were in the form of non-tariff barriers – something the World Trade Organisation should note when it considers how to mitigate ‘hidden’ protectionism.

Q4 Economic Outlook: learning to live with deflation

Central banks are still not getting the inflation they crave, even after a decade of monetary-policy easing. Japanese-style deflation could spread to the rest of the developed world – but it may not lead to a downturn in living standards. After all, Japan is a prosperous country with a $5tn economy. Instead, the main challenge would be the required shift in mindset. 

Warning: low growth ahead

The Organisation for Economic Cooperation and Development downgrades global growth forecasts in its latest interim economic outlook, citing rising trade tensions and policy uncertainty. It also identified a series of risks, including the possibility of a sharper slowdown in China, a no-deal Brexit and increasing financial vulnerabilities. This means that monetary accommodation needs to be supplemented both by fiscal support and more daring structural reforms.

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