Megaphone politics calming the stock markets?
As we also learned during the week from the US central bank’s April meeting statement and the latest employment figures, the Q1 economic deceleration is most likely just as transitory as it has been the previous two years. With unemployment dropping to just 4.4%, much additional economic stimulus from fiscal and deregulation measures would increase the risk of economic overheating, or at least much of it evaporating through wage inflation. Markets appeared to see it that way and rose despite the prospect of less help from politics and the central bank.
Far more important for us were two news items which were drowned out by all the other news flow. Firstly, that Greece’s bailout term changes have been agreed with the EU and the IMF which averts the next episode in the country’s never ending debt tragedy. Secondly, that Italy’s economy is likely to be growing at its fastest pace in 10 years. That is a great relief for its banks, because the better companies trade, the less likely that all those non-performing loans on Italian bank’s books will turn sour.
The UK & EU ‘divorce’ settlement
Given the added context of an imminent general election in the UK, the issue of the ‘divorce bill’, and the amount, attracted a lot of commentary in the UK’s press. Brexit is again set to have a significant bearing on domestic politics. Indeed, it is such a material issue that it is likely to influence, if not dominate, the political agenda in a number of other EU countries over the short to medium term.
Theresa May’s decision to call a snap election may actually help to alleviate some of the uncertainty around the timing and precise nature of Brexit (and the transition process). If the current opinion polls are correct and the emerging trend from the local elections solidifies, leading Theresa May to an improved majority in the upcoming election, the new UK Government would be in a stronger position to manage a seamless transition to Brexit.
China ‘hard landing’ fears return; hype or serious threat?
Chinese manufacturing growth in April unexpectedly slowed, after other early signs of a slowdown in Q2 activity levels. This dovetails with falling credit growth, reducing corporate investment and slowing construction.
The slowdown follows a strong Q1, in which GDP grew a better than expected 6.9%, a positive surprise against the backdrop of previous concerns over slowing growth in China. However, the fact remains that the country is transitioning away from an economic mix dominated by older manufacturing industries towards higher value added sectors, service sector expansion and increased domestic demand.
In conclusion, China’s growth is definitely slowing. However, compared to the situation 2 years ago, the other major economic regions of the world (Europe, Japan, US) are currently all running at a decent tack themselves, and are therefore far less dependent on the incremental demand pull from the Chinese economy. So, barring any additional negative economic developments, this Chinese slowdown has less potential to derail current growth momentum compared to its potency to stimulate it previously.
North Korean risks dissipate despite threats
We actually anticipate that the comments from North Korea decrease the geopolitical risk of the situation. China’s decision to join in with the US to stop North Korea’s nuclear build-up is clearly effective, explaining the regime’s anger. And, if China is involved in trying to calm the danger brewing below the border, it means that direct US military involvement in the country is unlikely. Despite President Trump’s apparent willingness to engage in global conflicts, his administration wouldn’t act while China are themselves putting pressure on North Korea.
Can UK business demand help offset the consumer slowdown?
Politicians may have cheered the news that the outlook for UK manufacturing improved in April at its quickest rate in nearly three years, while the construction and all-important services sectors also posted upbeat survey data. This quickly leads to the question of whether business demand can help offset a slowdown in consumer demand, amid growing Brexit-related uncertainties.
What is good for exporters is not always good for domestic consumers, however. As the pound has fallen in response to Brexit, imports have become more expensive. This has led to higher rates of inflation and has therefore impacted spending – and consumer spending accounts for 65% of UK GDP. There had been rising concerns that the combination of weaker consumer spending and postponed business investment could have a more negative impact on the wider economy than higher exports would be able to overcome.
Click here to read the full Tatton commentary