Markets signalled the slowdown now underway in industrial output and investment with a sharp sell-off at the end of last year. They challenged the Federal Reserve in particular to ease its tough stance, which it duly did as 2019 dawned. US policy is to spend more and tax less, offering some budget boost to the economy. An argumentative President expressed his displeasure at the way the Fed appeared to want to negate his budget stimulus, with rate rises and the cancellation of cash and bonds accumulated on the Fed’s balance sheet during the years of quantitative easing. The Fed decided that maybe it should be patient, pause interest-rate rises, and even reconsider the pace at which it slims its quantitative-easing-boosted balance sheet.
The US slowdown was not the only one markets worried about late last year. The danger was that the world’s authorities were engineering a synchronised slowdown. The European Central Bank announced its intention to end quantitative easing as December came to a close. Early in the New Year it had to intervene in the affairs of Banca Carige in Italy, putting it into administration. They are now having to send out messages that interest rates are not about to rise. Maybe they should propose new lines of credit for banks to lend on at advantageous rates to offer more support to a damaged banking system and a slowing economy?
The Chinese government has announced various steps to relieve the tough monetary stance it adopted in 2018 as part of a plan to reduce bad debts. The Chinese central bank has worked up a “three arrows” policy to provide more short-term and long-term lending to business, and to assist providing more equity capital. The tight rope they walk wants to get older and larger businesses to close down excess capacity, to clean up the air from nasty industrial discharges, and to strengthen stretched financial company balance sheets, without stopping growth. They need to find ways to finance a new generation of businesses in services and technology, and to expand the existing big names in these areas. There are signs that money growth is beginning to accelerate a bit, and policy statements of intent to loosen in the right way to sustain their 6% growth rate. President Xi would like to find a way out of the damage being done to Chinese technology interests by the US allegations and actions.
We are seeing some weak figures for output and sales in many areas and some of the surveys also make gloomy reading. The car market has been particularly badly hit. A strong European assault on diesel cars for environmental reasons has destabilised a business that was beginning to struggle for orders anyway, given the monetary tightening. In the US, car sales have fallen off a bit as a result of more expensive loans and tighter credit. Meanwhile, the leading companies face competitive challenge from new businesses wanting to deploy electrical vehicles and examining new rental and hire models that would mean fewer vehicles purchased by individual owners. President Trump has 90 days to decide what to do with the report on the car market, which may well highlight the higher tariffs on US cars into the EU than the US charges on European cars. There could be another round to the Trump trade battles.
On balance, we think enough will be done to avert a world recession, but we should expect slower growth this year with some economies flirting with recession. Italy is already in recession, and Germany followed a quarter of decline with the fourth quarter of 2018 with zero growth. The outlying Euro-area economies remain the most vulnerable to disappointment at a time when political uncertainties over the rise of populist parties and their impact on the next European Parliament and Commission will also affect the mood of investors. Weak banks and the tendency of the cash to end up in the stronger surplus countries can produce low or no growth in the deficit countries. China should pull herself out of the slowdown later this year, and the US is likely to perform more strongly than the Euro area again. This background makes a US/China trade deal more likely.
The above article was previously published by Charles Stanley on 19th February 2019