Hard landing risks rising
* Last week data showed that the number of people in employment in the UK has fallen by 56,000. Long the standout success in Britain’s recovery the jobs market is feeling the chill winds of weaker growth. Brexit has played a role, but weakening UK activity is small part of a wider, global story.
* The synchronised economic upswing of 2016-18, which lifted rich and developing countries alike, has gone into reverse. Not only are Germany, Britain and the US cooling; so too are India, China and Russia.
* On the face of it the International Monetary Fund’s (IMF) latest forecasts look fairly reassuring. They show the global economy growing by 3.0% this year, down from 3.6% last year and the weakest reading since the financial crisis, before picking up to 3.4% in 2020.
* The global recovery started in 2009 and is long in the tooth. The world is overdue a slowdown. The fact that the IMF, and most economists, are forecasting a short-lived downturn, a classic ‘soft-landing’, might seem like good news.
* But when growth is softening, as it is now, forecasts are more than usually lagging and fallible. (The IMF, and most economists, did not forecast the last recession, which was the biggest since the 1930s, until it had almost arrived.)
* What matters more than the IMF’s forecasts is their analysis. It is downbeat. The slowdown has come faster than the IMF expected with the effects of trade tensions proving more pervasive and damaging than the IMF, or most economists, had anticipated. Rising tariffs and the increasing politicisation of trade policy have sown uncertainty and hit exports. Manufacturing, with its heavy reliance on export sales, has been a conspicuous casualty with output slowing sharply across the West. Globalisation, at least measured in terms of trade, has almost ground to a halt.
* Germany’s precipitous downturn, which will make it one of the rich world’s slowest growing economies this year and next, is largely due to weaker exports. Its huge trade surplus, success in the Chinese market and prowess in auto manufacturing have long been sources of strength. As global trade and Chinese demand sag, and with environmental worries and the downturn weighing on car sales, they have become vulnerabilities.
* Business sentiment is heading down around the world. Uncertainty about future demand makes investing riskier. For businesses seeking to strengthen their balance sheet for the downturn cost cutting, not investment, is the priority.
* So far consumer demand has held up reasonably well. But the consumer cannot decouple forever from the fortunes of the private sector. Last week’s disappointing UK jobs data show that, eventually, wages and jobs reflect what is happening in business.
* Prospects for emerging economies have also weakened. The Chinese economy grew by 6.0% in the year to the third quarter, a heady rate by Western standards, but China’s slowest growth rate in 30 years. Prospects for a number of major emerging economies, including India, Brazil, Russia, Argentina and Indonesia have weakened since the beginning of the year.
* With interest rates in the West at historically low levels the scope for policymakers to counter weaker growth with monetary stimulus is less than it was on the eve of the last downturn. Central banks’ firepower is depleted though not exhausted. This means that more of the burden of resisting the downturn is likely to fall on fiscal policy, in the form of increased government spending and tax cuts.
* The Trump administration implemented sweeping tax cuts last year. From a policy point of view it was conspicuously ill-timed, coming at a time of near full employment and adding to an already strong recovery. More recently China has leaned against its slowdown by cutting taxes and Britain’s new chancellor has effectively jettisoned public sector austerity. With many governments in Europe facing negative interest rates on their debt, and therefore being paid by the private sector to borrow, others seem likely to follow the UK.
* It is possible to imagine things getting better from here. The Federal Reserve and the European Central Bank are easing monetary policy. Fiscal ease is likely to follow in a number of countries. The mercurial character of the current US administration, and China’s desire to bolster its economy, could yet deliver a US-China trade deal. Across most of the West unemployment is low and consumers are in fairly good spirits.
* Yet for now at least, the risks to global growth are tilted towards things being weaker, not stronger, than expected. The risk of the slowdown becoming a recession is rising.
Brexit betting odds and opinion polls
Note: Probabilities derived from betting odds from bookmaker Smarkets at 1700 on Sunday.
* The implied probability of a no-deal Brexit this year is 9%, down significantly from over 40% in August.
* The probability of a general election taking place this year has fallen since last week, and is now 29%.
* The opinion polls show the Conservative Party with a ten percentage point lead over Labour averaging across the last five polls. The two parties were neck and neck in late July, before Boris Johnson became prime minister.
* Betting odds imply a 71% probability of the Conservative Party winning the most seats in a general election.
* However, betting markets see the most likely outcome, with an implied probability of 54%, is a hung parliament. Betting markets assign a probability of 42% to a Conservative majority and 5% to a Labour majority.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.2% at 7,160.
Economics and business
* US treasury secretary Steve Mnuchin warned that US tariffs on Chinese imports announced for December would go ahead if China rejected the recent “phase one” trade deal
* The US imposed tariffs on $7.5bn of EU imports after the World Trade Organisation ruled in its favour over illegal subsidies paid by the EU to Airbus
* Tech company Samsung moved the last of its smartphone manufacturing out of China as higher wages and the threat of US tariffs weigh on the country’s attractiveness
* UK employment fell unexpectedly in August, ending almost two years of uninterrupted expansion; earnings growth slowed but remains well above inflation
* UK retail sales were unchanged in September from a month earlier, capping a lacklustre third quarter and prompting concerns over the resilience of household spending
* The Bank of England’s credit conditions survey found that UK banks plan the greatest tightening of lending conditions since 2008 due to rising defaults and falling demand
* The IMF predicted the UK was on course to miss its objective of running a balanced budget by 2025 under current plans
* US industrial production contracted by 0.4% in September in a sign of the difficulties facing the manufacturing sector around the world
* The Saudi Aramco IPO is to be delayed as the company wants to wait until it can provide clarity on its most recent quarterly earnings following the attack on its oil production facility, according to the FT
Brexit and European politics
* UK prime minister Boris Johnson secured a new transition deal with the EU regarding the UK’s withdrawal from the EU
* The deal would keep Northern Ireland broadly aligned with the EU preventing a hard border on the island of Ireland but necessitates a customs border down the Irish Sea between Northern Ireland and the rest of the UK
* Under the agreement, businesses in Northern Ireland will be able to take advantage of trade deals made by both the UK and the EU
* The transition period has not been extended since the earlier deal and would still end in December 2020 leaving a significant trade negotiation to be completed before then or another cliff-edge exit from current arrangements
* The planned parliamentary vote on the deal on Saturday did not go ahead after MPs narrowly voted for an amendment which put the vote on hold
* This required Boris Johnson to seek an extension to Article 50 from the EU. As set out in the ‘Benn Act’, Mr Johnson sent a letter requesting a delay on Saturday
* By forcing the government to seek an extension, MPs hoped this would allow time for the necessary legislation to be passed to avoid a no-deal exit
* The request for an extension is now being considered by EU leaders
* Further votes are expected in Parliament this week. Despite the delay, Mr Johnson’s deal appears to have the support of enough MPs that any vote will be very close
* The right-wing Law and Justice party won a second term in the Polish parliamentary elections
* Lengthy prison sentences decided by Spain’s Supreme Court for separatist Catalan leaders, who organised the independence referendum in 2017, have resulted in widespread protests in Catalonia
And finally… the case against a man in Russia accused of smuggling drugs into a prison using a cat suffered a setback after the feline accomplice escaped from the custody of the local petting zoo. The cat, described as having black, white and grey shades of fur, was allegedly fitted with a special collar to allow delivery of illicit substances. The defence lawyer argued that access to the cat would allow the court to ascertain “to what degree a cat would really be a viable instrument for the alleged crime at hand.” – flea bargain