It has been an encouraging start to the year as policymakers appear determined to tackle the challenges facing the global economy. The long-awaited “phase one” trade deal between the US and China is now scheduled to be signed on January 15, with China emphasising this week that it would honour the commitments it has made under the agreement. Cui Tiankai, China’s ambassador to the US, said: "We will always implement what we promised. There is no problem with that. And if there are any differences, any problems, the two sides should work closely together to solve them."
President Trump said that he would begin talks on a “phase two” agreement “at a later date” once the initial agreement is complete. He has stated that the phase one deal would account for 60% of any comprehensive trade deal.
China also took proactive steps to stimulate its slowing economy. It cut the capital reserve requirements for its banks – the amount of money they must hold to demonstrate their financial stability – by 0.5%. The Peoples’ Bank of China said the cut would inject 800bn yuan (£87bn) of liquidity into the system. The move is in addition to a change in the benchmark pricing of outstanding bank loans in China, which has had the effect of reducing the cost of debt for many of the country’s small and medium-sized businesses. The measures are all intended to boost economic activity by reducing costs for businesses and increasing the amount of credit available to consumers. China’s economy, the world’s second largest, is expected to have grown by between 6% and 6.5% in 2019 – its worst performance in 27 years.
Meanwhile, talk of a recession in the US is receding, despite its record economic expansion. The US bond yield curve, which shows the difference between short-term and long-term interest rates, is a closely-watched technical measure. Last year it inverted, which in the past has been a reliable indicator of approaching recessions. However, it has now reversed and is suggesting that rates will once again rise in the coming years. In fact, the yield curve is at its steepest since October 2018, indicating increasing confidence in economic expansion.
Also encouraging was data from the US property market, a key measure of consumer confidence. Sales of new single-family houses in the US rose by 1.3% in November compared to the previous month to a seasonally adjusted annual rate of 719,000, rebounding from a 2.7% drop in October and beating expectations of a 0.3% drop. In the UK, too, there are signs of a bottoming-out in the housing market as data from UK Finance, the trade body, showed banks approved 43,700 mortgages for new house purchases in November – a three-year high. Approvals for re-mortgages were over 12% higher. Nationwide Building Society said today that average UK house prices rose by 1.4% in 2019, although London prices fell by an average of 1.8%.
However, the scale of the challenges should not be underestimated. Numerous surveys of manufacturing activity released this week painted a fairly downbeat picture. In the UK, the IHS Markit/CIPS manufacturing Purchasing Managers’ Index sank to 47.5 in December from 48.9 in November. The poor reading was blamed on weak global demand and reducing inventories built up ahead of a possible no-deal Brexit. It was the eighth consecutive month with a reading below 50.
In China, the news was more positive, with activity expanding in December, but by less than expected. The Markit/Caixin Purchasing Managers’ Index for manufacturing hit 51.5 in December – below expectations of 51.7 and down from the 51.8 reading in November, but any reading above 50 indicates expansion. Business sentiment, which is also covered in the survey, improved. The survey came after a separate manufacturing PMI survey by China’s Bureau of Statistics which showed activity slightly higher than expectations at 50.2.
Europe’s manufacturing sector ended the year in recessionary territory, with the IHS/Markit PMI for the eurozone producing a reading of 46.3, a deterioration from November when it read 46.9. Output, new orders and employment all fell, but businesses still said they were more confident about the future.
Finally, a survey of more than 6,000 businesses, released by the British Chambers of Commerce (BCC), suggested that the UK economy ended 2019 in virtual stagnation due to mounting business costs and the global economic slowdown.
The BCC is predicting a drop in economic growth to 0.2% in the final quarter from 0.3% in the third quarter of last year. The BCC said the service sector, which accounts for around 80% of UK GDP, deteriorated in the final quarter. Suren Thiru, the BCC’s head of economics, said: “The fourth quarter was characterised by a broad-based slowdown in the dominant services sector with all key indicators weakening in the quarter, amid sluggish household expenditure and crippling cost pressures.”
The Bank of England has also forecast a slowdown in the final quarter, predicting growth of just 0.1%.
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