Global Macro: Manufacturing to weaken further as trade war intensifies – The US-China trade war escalated to a new level last Friday, with China announcing retaliatory tariffs of 5-10% on $75bn of US imports, and US President Trump responding almost immediately by raising proposed tariff rates on Chinese imports – from 10% to 15% on $300bn of imports (most of which to be implemented 1 September), and from 25% to 30% on $250bn of imports (to be implemented 1 October). In addition, President Trump ordered US companies ‘to immediately start looking for an alternative to China’ – signalling an intent to make the trading relationship with China economically prohibitive, which would lead to a longer term decoupling of the world’s two largest economies.
All of this is consistent with our base case for an ongoing escalation of the trade war, and consequently much weaker economic growth. As a result of this, we are well below consensus in expecting growth of just 0.6% next year in the eurozone (consensus: 1.1%), and 1.3% in the US (consensus: 1.8%). The slowdown will continue to be led by manufacturing, but increasingly, the manufacturing slowdown will begin to infect other parts of the economy. Already there are signs of this, with investment turning negative in the US and likely to do so in the eurozone, and jobs growth slowing in both economies. With the recent escalation in tensions, uncertainty for business will intensify further still, and likely lead to a renewed leg lower in confidence measures. While eurozone flash PMIs stabilised in August, the German Ifo reached a new cyclical low today, and in the US, the Chicago PMI and the ISM manufacturing PMI are likely to signal further weakness when they are published next week. (Bill Diviney)
Euro Macro: The potential for eurozone fiscal stimulus – The call for fiscal stimulus in the eurozone is becoming louder, but the room for stimulus is limited by EU rules and national political choices. We have calculated the potential room for stimulus from different perspectives. First, there is room within the European Commission’s MTOs (Medium-Term Objectives). If the countries that have either met or passed their obligations from the MTO used the available fiscal room, around EUR 65bn of stimulus would be feasible. The bulk by Germany (EUR 54bn) and the Netherlands (EUR 9bn). Alternatively, the rules of the EC could be ignored, and we can calculate the level of stimulus that would result in stabilisation of the debt ratio at its current level. This would result in a total potential stimulus of around EUR 160bn. Again, the bulk by Germany (EUR 85bn) and the Netherlands (EUR 25bn). Finally, the EC already allows countries to deviate temporarily from their MTOs in order to accommodate investment when their economies are contracting or growing well below their potential, albeit under a strict set of conditions. Although it is difficult to translate this guidance into exact numbers, we think that extra government investment of around EUR 140bn would be possible in total.
Assuming that a fiscal stimulus equal to 1% of GDP, lifts eurozone GDP by around 0.5-0.7%, we calculate that our range of estimates of the room for fiscal stimulus (EUR 65bn – EUR 160bn) would lift eurozone GDP growth by between around 0.25 and 0.75 pps. Depending on the shape and size of the stimulus, it could start having an upward impact on growth in the course of 2020. Our current base case scenario is that eurozone growth will remain stuck at modest levels well below the trend rate throughout 2020. A fiscal stimulus package in line with maximum potential size according to our calculations (around EUR 160bn) could lift growth to close to the trend rate in the course of 2020. Still, governments are not moving quickly or significantly, so we think any stimulus would be at the low end of the range. For more information, please read our research note here. (Aline Schuiling)