ECB boosts support for the economy
On September 13th, at his penultimate meeting as ECB1 head, Mario Draghi announced a fresh set of accommodative measures. The central bank’s new package includes a 10 bps cut in the deposit facility rate to -0.50%, a partial exemption mechanism to cushion the negative effects of this measure on banks’ earnings, a relaunch of QE2 amounting to €20 billion per month for an unlimited period, more favourable conditions for the new TLTRO 33 operations, and stronger forward guidance4 by linking interest-rate changes to those of inflation.
In justifying the measures, Mario Draghi pointed to the slowdown in eurozone growth over recent quarters, ongoing international uncertainties, and weak inflation. These elements form the basis of the ECB’s latest 2019 and 2020 growth and inflation forecasts, which are significantly weaker than those delivered in June 2019. The ECB now forecasts 2019 growth at 1.1% (-0.1 percentage points) and 1.2% for 2020 (-0.2 points). Similarly, 2019 inflation is forecast at 1.2% (-0.1 points), while that for 2020 is now 1.0% (-0.4 points).
September’s PMI5 surveys delivered an unwelcome surprise. Having been relatively stable since the start of the year, the overall eurozone composite PMI fell back from 51.9 to 50.1, a level consistent with a growth rate of close to 0.5% on an annualised quarterly basis. The fall was due in particular to Germany’s manufacturing PMI dropping from 43.5 to 41.7, a level not seen for a decade. German economic data available up to August suggest third-quarter GDP will be in positive territory after slipping an annualised 0.3% in the second quarter.
Eurozone consumer spending data remain robust and the labour market continues to improve. Although third-quarter retail sales fell back slightly, they are still buoyant, rising 2.0% on a year-on-year basis. Car sales plummeted 18.7% in September, but figures from August and September were distorted by a recent change in vehicle standards. The unemployment rate continues to fall with August’s reading at 7.4%, close to the record low of 7.3% set in 2008.
ECB1 : the European Central Bank (ECB) is the monetary institution of the European Union. It is based in Frankfurt and is responsible for the monetary system of the European Union (EU) and its currency, the euro.
QE2 (Quantitative Easing): monetary policy type known as “non-conventional” consisting for a central bank in massively buying back debt securities from financial actors.
TLTRO 33 : series of targeted long-term refinancing operations launched by the ECB in order to keep favorable credit conditions in the Eurozone and maintain an accommodative monetary policy.
Forward guidance4 : tool used by a central bank to exercise its power in monetary policy in order to influence, with its own forecasts, market expectations of future interest rate levels.
PMI5 : PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).
Recession fears are premature
As expected, the Fed used its September meeting to cut its benchmark interest rate target range for the second time in a row, this time by 25 bps to 1.75–2.00%. The central bank considers that the US economy remains strong overall, but that the risks stemming from the global growth slowdown and international unknowns are significant enough to warrant a precautionary monetary policy softening.
The Fed’s dot plot and September meeting minutes show real divisions across the Federal Open Market Committee1. The median value of the interest-rate projections by the 15 members indicates no further change in rates for 2019 or 2020, but 8 members are in favour of another rate cut in 2020. Meanwhile, bond markets are pricing in several rate cuts over the next two years, but if international uncertainties subside, then rate-cut expectations could adjust accordingly.
During Jerome Powell’s press conference, he explained that recent disruption in refinancing rates had affected neither the overall economic outlook nor the Fed’s capacity to manage interest rates. To avoid future disruption, the Fed announced that from October 15th, it would be buying Treasury bills until the end of the second quarter 2020, with initial volumes in the region of $60 billion per month.
In terms of economic backdrop, the ISM2 survey indicates that the US manufacturing sector is still under pressure and some spillover is starting to be felt in the services sector. After falling below the 50 mark in August, September’s manufacturing ISM slipped further from 49.1 to 47.8. The non-manufacturing index also faltered, sliding from 56.4 to 52.6 with the new orders component particularly weak.
These numbers have raised what we believe to be premature fears of an imminent recession.
The residential sector continues to rebound and the jobs data are still buoyant overall. Although job-creation numbers have slipped back in the past six months and are now coming in at around 154,000 on average compared with 230,000 in 2018, this slowdown is only to be expected after a decade of growth and with unemployment at record lows. Indeed, September’s unemployment rate was 3.5%, its lowest since 1969.
Federal Open Market Committee1 : a committee within the Federal Reserve System (the Fed), is charged under United States law with overseeing the nation’s open market operations (e.g., the Fed’s buying and selling of United States Treasury securities).
ISM2 : this index is divided into two main families: the manufacturing ISM, reflecting the health of the sector in the USA, and the services ISM, more specific to tertiary activities.
An ongoing growth slowdown
Chinese growth continued to slow in the third quarter, moving from 6.2% to 6.0% year-on-year and now sitting at the lower end of the official 2019 target range of 6.0–6.5%, primarily held back by the secondary sector slowing from 5.6% to 5.2% year-on-year.
After a poor July and August, the economic data for September indicated somewhat stronger momentum. In year-on-year terms, industrial output grew from 4.4% to 5.8%, retail sales grew from 7.5% to 7.8% and investment spending rose from 4.2% to 4.7%. In contrast, the trade balance remained weak as exports to the US continued to fall (-21.9% year-on-year).
The details underlying these numbers reveal a slowdown in the manufacturing sector and in car sales too. Car sales fell back following high second-quarter sales due to new anti-pollution standards being introduced in several cities on 1 July 2019. In a bid to empty their forecourts of non-compliant vehicles, car sellers had slashed prices. Elsewhere in the economy, the picture looks brighter.
Property investment levels are healthy and the start of an improvement in infrastructure investment spending has materialised, suggesting that official stimulus measures are feeding into the real economy. In parallel, the rate of credit expansion continues to steadily increase, in part thanks to measures by the central bank, which once again lowered its reserve requirement ratio for banks in September.
On the trade-talks front, there were some positive developments. The United States has agreed to delay a fresh increase in customs duties on $250 billion worth of Chinese goods that had been pencilled in for October 15th. In return, China has, among other things, committed to purchasing more agricultural products and to giving US companies greater access to its financial sector. This first step towards a fuller global agreement could be made official during the mid-November APEC summit meeting1.
APEC Summit Meeting1 : Asia-Pacific Economic Cooperation is an intergovernmental economic forum aimed at facilitating economic growth, cooperation, development and investment in the Asia-Pacific region. It meets every year.
See also : China: Mixed signals from the economy
The opinion expressed above is dated 18 October 2019, and is liable to change.
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