15 January 2020

Monthly Economic Update

Every month, our economists study the macroeconomic situation. They analyse the events that have had an impact in recent months, and discuss possible consequences.

Turbulent Twenties

With political populism showing little sign of abating the risk is that the 2020s will be even more turbulent than the last decade.

US: The twists and turns ahead

  • A strong start to 2019 gave way to fears of recession only for an easing in trade tensions and three Fed rate cuts to turn sentiment around again. 2020 could prove more unsettling with geopolitical tensions spreading to the Middle East and domestic politics remaining fraught. With limited opportunity for stimulus, we see growth risks skewed to the downside.

Eurozone: Signs of stability

  • The jury is still out on whether the eurozone slowdown is coming to an end or is merely on hold. The main culprit, the manufacturing sector, was still in recession in December, probably signalling weak fourth quarter growth (we think 0.1% growth at best). While there is hope for improvement this year, this will not be enough to prompt a move from the ECB to raise interest rates.

UK: Big changes coming as EU trade talks loom

  • Prime Minister Boris Johnson's decision not to extend the 11-month post-Brexit transition period means negotiators have their work cut out to agree a basic free-trade deal this year. The UK-EU trading relationship may well change at the start of 2021, but we may not know exactly how until later into 2020, setting up another uncertain period for the economy.

China: Interest rate reform won’t stop yuan volatility

  • China's central bank is forcing lenders to adopt the Loan Prime Rate as the basis of quoting interest rates to borrowers. This will speed up China's interest rate liberalisation process. Here, we discuss how this move is likely to affect monetary policy in 2020.

Japan: Just spend it

  • In what looks like an admission that monetary policy is out of ammunition, Japan’s government is now turning back to fiscal stimulus to give the economy a boost. The size of the package, however, provides no excuse for raising our GDP forecasts, just an excuse not to slash them.

FX: Bounce back

  • Early year tension in the Middle East has failed to dampen bullish sentiment in FX markets. Assuming no severe escalation, pro-risk currencies should continue to make modest gains and the dollar should stay supported against the euro and Japanese yen.

Rates: All the 2s in 2020

  • The rates profile for 2020 has a particular focus on the 2s when it comes to the global benchmark (the US). Or more correctly, the sub 2s. That describes the growth, inflation and 10-year yield prognosis. It's L-shaped in the sub-2% area, but with a downside bias as a central risk. We could see breaches above 2, but the central tendancy is resumption below

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