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February 19 Macroeconomic Review
Global Economy
o Great concerns over global growth due to trade-war uncertainty, “no deal” Brexit possibility, the slowdown in China and the prospect of monetary policies which erode businesses, investors and consumer sentiment
o The IMF downgraded its forecast for the world growth for the second time in three months to 3.5%, the lowest in 3 years. The main reasons for the cut were the weak demand across Europe and the turmoil in financial markets
o Global economy is not positioned well for normalization in monetary policy as debt level doubled from 2007 and credit rating deteriorated
o The time frame to reach a trade deal between China and the US is until March 1
st. China’s attempt to lure the US
officials by offering to eliminate the trade deficit in 6 years will fall short of solving the dispute because it doesn’t solve issues like intellectual property theft and control on new technologies
o Worse than expected figures in China (the slowest growth since 2009) as uncertainty about the trade-war takes aheavy toll and increases the pressure to achieve a trade deal
o Financial markets are experiencing a sharp correction since last Christmas as investors assume that policy makers will hold their restrictive stance. The high level of uncertainty lying ahead casts a shadow on its ability to continue.
United States
o The US economy indicators are mixed: on the one hand, job market continue to tighten and manufacturing gains remain healthy. On the other hand, the housing market is still week and consumer and investors sentiment erode. The mixed picture is a signal of moderation for the economy facing slowing global growth, uncertainty regarding the trade war and waning effects of the fiscal stimulus
o We are in the tipping point in the balance of world power as the US is becoming a net oil exporter due to soaring US
production, driven by the extraction of oil from shale
o The partial federal government shutdown ended temporarily after 35 days. Uncertainty about the ability of lawmakers to reach a permanent deal until February 15. The cost of the shutdown varies between 0.25% to 0.5% of GDP
o Labor market conditions in January were extremely tight. The economy added 304K payrolls and wages rose 3.1% last year. People are pouring back into the work force, hence the unemployment rate rose to 4%
o The FOMC voted unanimously to maintain the target range at 2.25%-2.50%; “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments appropriate”. In a separate statement, the FED declared its intention to keep ample supply of reserve and adjust its normalization in light of economic and financial development.
Eurozone
o As the currency celebrate its 20th birthday, economic indicators signal that the euro region economy continue to struggle and is expected to further slow due to unfavorable development in the global and local economy
o The IMF cuts its forecast for the euro area by 0.3% to 1.6% in 2019. The fund cited great weakness in Germany due to soft local demand and weak production and downgraded its growth by 0.6% to 1.3%
o Populist parties continue to gather political strength ahead of the European parliamentary elections in May, preventing the implementation of critical reforms and integration (such as the banking and financial union, the fiscal union and the job markets reforms) that are necessary for its survival
o Italy, the weakest link of the euro area, fell back into recession; it contracted in Q4 by 0.8% (annual terms) after 0.4% contraction in Q3
o Core inflation edged up 0.1% to 1.1%, as headline inflation decreased by 0.2% to 1.4%. This figures are another part of the
economic puzzle presenting the downturn in economic activity
o The ECB kept policy unchanged and reiterated its guidance to leave interest rates unchanged at least through the summer. The bank acknowledge the deterioration of the region growth outlook and the shift downside of the balance of risk, which decrease the probability of a rate hike during 2019
