December 11, 2019

Early Christmas for (still weak) global growth

BY Olivier Desbarres

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( 9 mins)

There is a growing consensus that global economic growth will slowly recover in 2020, particularly in the second half of the year.

We made this prediction nearly four months ago in Central banks to the rescue…with a lag (27 August 2019), pointing to the positive, lagged impact of central bank rate cuts on global GDP growth.

Since May, the global central bank policy rate has been cut about 50bp to just below 2.20% – its lowest level in nearly two years – and if anything, global GDP growth has seemingly stabilised a little earlier than we had anticipated at around 3.0% yoy.

Our monthly measure of global retail sales also shows that growth has been broadly stable year-to-date at around 2.7% yoy.

We maintain our view that the 4-quarter lagged relationship between the global central bank policy rate and global GDP growth points to broadly stable GDP growth of 3.0% yoy in H1 2020 and a modest recovery in H2 2020 to around 3.5% yoy (see Figure 1).

If this proves correct, we would expect central bank rate cuts to become increasingly rare over the next 12 months.

However, as our analysis shows, fluid international trade developments, including between the United States and China, are still likely to condition our GDP growth (and central bank policy rate) forecasts going forward.

 

Our forecast of a global growth recovery in 2020 is slowly becoming consensus

There is a growing consensus that global GDP growth will slowly recover in 2020, particularly in the second half of the year. UBS Wealth Management, Goldman Sachs, JP Morgan and Morgan Stanley have all in recent weeks forecast a recovery in global GDP growth in 2020 as a result of central banks around the world having eased monetary policy and a possible thawing of international trade tensions.

We made this prediction nearly four months ago in Central banks to the rescue…with a lag (27 August 2019), pointing to the positive, lagged impact of central bank rate cuts on global GDP growth: “Our analysis shows an inverted, 4-quarter lagged relationship between [a lower] global central bank (nominal) policy rate and [higher] global GDP growth. If this historical relationship holds going forward, we would expect GDP growth to slow further in Q3 and Q4, before stabilising in H1 2020 and slowly recovering in H2 2020.”

If anything, global economic growth has seemingly stabilised a little earlier than we had anticipated. We maintain our view that the 4-quarter lagged relationship between the global central bank (nominal) policy rate and global GDP growth points to broadly stable GDP growth of 3.0% yoy in H1 2020 and a modest recovery in H2 2020 to around 3.5% yoy (see Figure 1). If this proves correct, we would expect central bank rate cuts to become increasingly rare over the next 12 months. However, as our analysis below shows, fluid international trade developments, including between the US and China, are still likely to condition our GDP growth (and central bank policy rate) forecasts going forward.

 

Early Christmas for (still weak) global growth 8

 

Central bank rate hikes and trade wars have weighed on global economic growth in 2019

Tighter central bank monetary policy in 2018 and an escalation in the US-China trade war in the past 18 months have, based on our analysis, significantly contributed to weaker global economic growth. Figure 1 suggests that central bank rate hikes in 2018 had a lagged, negative impact on global GDP growth which slowed from about 3.9-4.0% yoy in H1 2018 to about 3.0% yoy in Q2-Q3 2019. Moreover, this growth slowdown has been associated with an acceleration in the downturn in global trade growth from about 4% yoy in H1 2018 to -1.1% yoy in Q3 2019 (see Figure 2). This in turn coincides with the start of the trade war between the United States and China in April 2018 (see Renminbi depreciation – Case of déjà vu, 16 May 2019).

 

Early Christmas for (still weak) global growth 9

 

Global central bank policy rate has been cut 50bp since May to below 2.2%

However, broad-based central bank policy rate cuts in the past seven months have seemingly, with a lag, put a floor under global GDP growth. If anything, global economic growth has stabilised a little earlier than we had predicted.

Since early May, central banks in Australia, Brazil, Chile, China, the Eurozone, India, Indonesia, Korea, Malaysia, Mexico, New Zealand, the Philippines, Russia, South Africa, Thailand, Turkey and United States have cut their policy rates (see Figure 3). Since 21st December 2018 only two major central banks – the Czech National Bank and Norges Bank – have hiked their policy rates in net terms (by 25bp and 50bp, respectively. This is line with our year-old forecast that “Policy rate cuts, which have all but disappeared since the spring, may yet resurface in the second half of 2019” (see Global central bank rate hikes: part solution, part problem, 21 December 2018). Moreover, on 12th September the European Central Bank announced that it would resume its net assets purchases (i.e. its quantitative easing program) at a monthly rate of €20bn from November onwards and “for as long as necessary.”

 

Early Christmas for (still weak) global growth 10

 

Our measure of the global central bank policy rate, which had been stable around 2.70% between December 2018 and May 2019, has been cut over 50bp to just below 2.20% – its lowest level in nearly two years (see Figure 4). The GDP-weighted average of emerging market central bank policy rates has been cut 75bp to around 4.7%, its lowest level in decades.

 

Early Christmas for (still weak) global growth 11

 

Global GDP and retail sales growth may have bottomed out, albeit at low level

According to our own quarterly time series of global GDP, which aggregates national figures using annual IMF PPP weights, growth slowed only very marginally in Q3 to 2.95% yoy from 3.0% yoy in Q2 (see Figure 5). GDP growth slowed in China, Hong Kong, India and South Africa but was broadly stable in the OECD, Brazil, Indonesia and Thailand and rose in the Philippines, Russia, Singapore and Taiwan.

Moreover, based on the historical, positive correlation between the global manufacturing Purchasing Managers Index (PMI) and our measure of global GDP growth, the up-tick in the manufacturing PMI in October-November to 50.1 from 49.5 in Q3 points to a modest recovery in GDP growth in Q4 to just above 3.0% yoy (see Figure 5). If correct, this would imply GDP growth of about 3.0% in 2019, broadly in line with our July 2019 forecast of 2.9% (see Global growth is slowing, not in recession, 29 July 2019) and in line with the International Monetary Fund’s downwardly revised forecast.

 

Early Christmas for (still weak) global growth 12

 

Supply-side national accounts indeed point to a recent, modest recovery in global industrial output growth while demand-side national accounts suggest that growth in consumer demand, as proxied by retail sales, has been stable year-to-date.

Our monthly, GDP-weighted data series for the volume of global retail which includes the US, China, European Union, Japan, Korea, Brazil, Canada, Australia and Switzerland – economies accounting for over three quarters of world GDP – has  historically closely correlated with global GDP growth (see Figure 6). Retail sales growth, which slowed from about 4% yoy in H2 2017 to 2.6% yoy in Q4 2018, has since hovered around 2.7% yoy.

 

Early Christmas for (still weak) global growth 13

 

This global data series nevertheless masks significant variations in individual countries’ retail sales, both in the level and change in growth rates (see Figure 7). Growth in the volume of retail sales remains very weak in Canada and has slowed sharply in China. Conversely, retail sales growth has picked up in Korea and Brazil. It has also turned positive in Japan although this is partly due to consumers bringing forward their purchases to September ahead of the planned sales tax hike in October.

 

Early Christmas for (still weak) global growth 14

 

Central bank rate cuts probably not the story of 2020

We maintain our view that the 4-quarter lagged relationship between the global central bank (nominal) policy rate and global GDP growth points to broadly stable GDP growth of 3.0% yoy in H1 2020 and a modest recovery in H2 2020 to around 3.5% yoy (see Figure 1).

If this proves correct, we would expect central bank rate cuts to become increasingly rare over the next 12 months. The Reserve Bank of New Zealand (RBNZ) and Reserve Bank of India (RBI) have already surprised markets in recent weeks by not cutting their policy rates, in line with our view that markets had perhaps become complacent to this risk (see Depressed FX volatility allows for few surprises, 22 November 2019). The RBNZ kept its policy rates unchanged at 1.00% at its 13th November meeting and the RBI kept rates on hold at 5.15% at its 5th December meeting, contrary to analysts’ expectations that both would cut rates. However, as our analysis shows, fluid international trade developments, including between the United States and China, are still likely to condition our GDP growth (and central bank policy rate) forecasts going forward.

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