Markets are betting that central banks around the world will cut interest rates to help offset the economic impact of the coronavirus, and support falling equity markets. The International Monetary Fund (IMF) last weekend downgraded its global growth forecasts for 2020, suggesting that fallout from the outbreak of so-called Covid-19 would cut 0.1% from global growth this year. It also trimmed its growth outlook for China to 5.6%, down from last year’s growth rate of 6.1%.
Markets are now pricing in at least two rate cuts by the US Federal Reserve in 2020, and one rate cut in the UK. In Europe, where interest rates are already at minus -0.50%, the ECB is expected to trim rates by a further 0.1%, and central banks in Canada, Australia and Japan are expected to cut too.
In the UK, the spectre of a no-deal Brexit emerged once again as Boris Johnson said he may walk away from trade talks in June unless a “broad outline” of a trade deal has been agreed by that point. The news added to a fairly downbeat week for economic data.
Germany’s economy flatlined in the final quarter of 2019, as demand for exports weakened, according to data from the Federal Statistics Office. Growth was 0% compared to the third quarter, while the annual pace of growth was just 0.4%. Nor is the year ahead looking much better, with economists forecasting growth of just 0.2% for 2020, and that is without factoring in the impact of the coronavirus, which will likely hurt Germany’s export-heavy economy further.
In the US, economic data was better. Consumer confidence remains strong, underlying durable goods orders saw a decent rise, jobless claims remain low and new and pending home sales surged in January, in addition to house prices rising in December.
In Britain, hopes of a post-election bounce appear to be fading as retail sales fell short of expectations in February. A survey by the Confederation for British Industry (CBI) showed a net balance of only 1% of retailers reported rising sales in the year to February. Economists had expected an increase of 4%. A net balance of 13% of retailers said orders placed with suppliers had fallen, and they were expected to fall an even faster rate next month.
Consumer sentiment seems to be holding up, however. The GfK Consumer Confidence Index rose for a third consecutive month in February. The index rose two points to a reading of -7 in January, beating forecasts for a reading of -9. The index measuring consumers’ views on the state of the economy over the next 12 months rose three points. While the index is still in negative territory, it is heading in the right direction. Joe Staton of GfK said the improvement came "against a February backdrop of rising wages and house prices, low unemployment and stable inflation."
Meanwhile, UK house prices rose at their fastest pace since 2018 in February, according to Nationwide Building Society. The mortgage lender said prices rose at an annualised rate of 2.3%, up from the 1.9% annual rise it reported in January. Nationwide’s chief economist Robert Gardner said: "The decisive election outcome may have provided a boost to buyer sentiment," but he added that "significant uncertainties" remained, from the impact of the coronavirus on the global economy to the negotiations for a trade deal with the EU. "Overall, we expect the UK economy to continue to expand at a modest pace in 2020, with house prices remaining broadly flat in 2020 as a whole," he said.
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