Global Macro: ‘Phase One’ deal reduces tail risks, but it won’t supercharge growth – The détente announced last week in the US-China trade war is certainly a positive development, and came close to our expectations of a ‘truce’ (i.e. tariff ceasefire) with some limited rollback of existing tariffs (the 15% tariff on $120bn of imports will fall to 7.5%, with the 25% tariff on $250bn remaining). What came as a surprise were the commitments apparently made by China to import an additional $200bn in goods and services above 2017 levels (i.e. $386bn in total) over the next two years. Given the low base because of the recent fall in imports, this would necessitate a dramatic rise in annual imports from current levels by the end of 2021. Indeed, official communication from China has so far been notably lacking in detail on the amounts imports from the US would rise by, and Chinese officials cautioned in a rare press conference last Friday that any increases ‘should be based on market principles and WTO rules’. This provides ample cover for any shortfall in import increases, and it would arguably be at the US’s discretion whether China will have done enough to fulfil its side of the bargain when the time comes.
Such parameters defining the deal means trade relations will remain fragile, and while a step in the right direction, we fear the deal could be torn up if President Trump finds himself dissatisfied with the progress made next year. As such, while the downside risks to growth are certainly lower than in a continued escalation environment, we think global business confidence will remain relatively subdued. This was underlined today by the renewed fall in manufacturing PMIs in the eurozone. Combined with continued relatively tight financial conditions in China (compared with the previous two cyclical upswings in 2010-11 and 2016-17), we continue to expect only a mild recovery in the industrial sector later next year, keeping growth below trend in the advanced economies. (Bill Diviney & Arjen van Dijkhuizen)
China Macro: November data suggest industrial activity is bottoming out – China’s monthly activity data for November published today came in clearly better than the remarkably weak October numbers, as well as outperforming consensus expectations. Industrial production growth accelerated to a five month high of 6.2% yoy (October: 4.7%, consensus: 5.0%). Retail sales growth rose to 8.0% yoy (October: 7.2%, consensus: 7.6%). Fixed asset investment was unchanged and in line with expectations at 5.2% yoy ytd, remaining at historic lows. Although monthly data can be volatile, reflecting the impact of for instance seasonal distortions or certain tax policies (and the fading thereof), other data for November (PMIs, imports, lending data) published earlier this month also pointed at improving momentum. Bloomberg’s monthly GDP tracker rose to a five-month high of 6.7% yoy in November, up from 5.9% in October, and an average of 6.1% in Q3. The bottoming out in economic activity is partly shaped by a rebound in car production, which has been a key drag on growth since mid 2018). Moreover, the turnaround is supported by Beijing’s piecemeal monetary and fiscal easing (mini interest rate cuts, RRR cuts, increased space for local governments to fund infrastructure projects), improved prospects of a Phase One US-China trade deal (see above), a stabilisation in the global IT cycle, and a possible end to destocking. The recent data are in line with our expectation that China’s industry will bottom out, helping the economy to stabilise in 2020, after headwinds from previous financial deleveraging and the US-China conflict caused a slowdown in official GDP growth since mid 2018. (Arjen van Dijkhuizen)