There was generally good news for the global economy this week after a Phase 1 trade deal between the US and China was agreed late last Friday. China has pledged to buy more agricultural products, while the US cancelled the tariffs that were due to be imposed on Chinese imports last Sunday. It also reduced some existing duties.
Then came Chinese data suggesting an improvement in the Chinese economy. China’s National Bureau of Statistics said that industrial production increased by 6.2% in November compared to a year earlier, up from a 4.7% annualised increase in October. Retail sales rose by 8% in November compared to a year before. Both sets of figures were well above expectations. Some economists have raised their forecasts for Chinese growth for 2020 as a result.
In the US, there was positive news for the housing market – a key driver of the overall US economy, as the National Association of Home Builders/Wells Fargo Housing Market Index, a measure of homebuilder confidence, hit a 20-year high in December. That bodes well for continued economic expansion in the US in 2020 as the housing sector expands and, as mortgage rates fall, more people buy homes or renovate existing ones, with a resulting “trickle-out” effect on the economy. Conversely, in the UK, early indicators are that the economy has slowed further as we approach the year end. Preliminary figures from IHS/Markit suggest that manufacturing production suffered its sharpest decline since the financial crisis in December, while the key services sector, which accounts for 80% of UK GDP, also contracted. The IHS Markit/CIPS Flash Purchasing Managers' Index fell to 48.5 from 49.3. Any reading below 50 means activity is contracting. The service sector dropped to a reading of 49 in December from 49.3 in November, below expectations for a reading of 49.6.
The Bank of England released a similarly downbeat assessment when it announced its decision to keep interest rates on hold on Thursday. The Bank said it expected the economy to grow by just 0.1% in the final three months of the year, less than it had previously predicted, as household spending fell and business investment was flat. In a hint that it may cut rates next year, the Bank said: “Monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation.” Two of the nine members of the Bank of England’s Monetary Policy Committee voted to cut rates immediately by 0.25%, prompted in part by worries over the UK jobs market. Although data released this week by the Office for National Statistics (ONS) showed the number of people in work rose by 24,000 in the three months to the end of October, the ONS said employment was essentially little changed over recent quarters. In addition, a sign that the labour market could be slowing was highlighted by the fact that job vacancies have fallen for 10 months in a row and have now dipped below the 800,000 mark for the first time in more than two years. The ONS also announced that wage growth, including bonuses, slowed to 3.2% from 3.7% in the three months to the end of October. Inflation data released this week showed that the Consumer Prices Index remained at a three-year low of 1.5% in November, which means workers are seeing wages rise by double the increase in the cost of living. However, it does not appear to be translating into consumer spending. UK retail sales fell by 0.6% in November compared to October, according to the ONS. It was the fourth consecutive month without sales growth, the worst performance since 1996. However, the data did not capture the Black Friday sales weekend, so the figures may in fact be better than reflected in these results.
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