20 September 2019
China and US holding up for now
Despite the their trade war, the behemoth economies of the US and China continue to hold up, and are respectably above their lows, although China’s GEAR is somewhat overdependent on consumer strength and the US GEAR contains several pockets of concern.
China’s GEAR continues to edge higher, comfortably above its lows after a big slowdown in the fourth quarter. Business surveys are flat in recent months, and auto sales have rebounded from their recent lows. However, real estate activity looks as if it is slowing significantly after a surprisingly strong start to the year. Corporate revenue also appears to be having a weaker quarter. That said, economic uncertainty surprisingly seems to be easing from its elevated levels.
In the US, the most notable weakening was seen in consumption data, from unsustainably strong growth rates, with normalisation in hard data mirrored in some measures of consumer sentiment. However, consumer components remain above-trend for now. Labour market indicators are flat-lining, which reflects a healthy backdrop but with no slack remaining.
‘Little guys’ manage to find a foothold
This month belongs to the ‘little guys’ - the plucky small open economies like Sweden, Switzerland, and the UK - that have managed to find a foothold after a very painful patch. It is notable that external trade components of many GEARs, having led this cycle on the way down, have started to edge up, albeit from very weak levels.
In the Eurozone, Germany’s GEAR extends its straight-line deceleration towards contraction, but it would be unfair to focus overly on Germany’s cyclically challenged plight; Spain, Italy and France have been stable, at varying levels of strength, throughout the first half and comfortably into the third quarter.
In emerging markets, we see a similar lack of direction: for every Brazil that ticks up into expansion, a Mexico falls into contraction; for every China that edges higher, a Korea is edging lower one step behind; while the struggling economies of South Africa and Turkey are far above their crippling lows, the formerly-unassailable powerhouses in the Czech Republic, Poland and Hungary (CEE3) show an abrupt crumbling.
Geopolitical tail risk
Overall, the readings have averaged out to a stable, subdued, summer for the GEARs. The next trend will likely depend on whether the ‘long and variable lags’ of dramatically easing monetary conditions can offset the headline-grabbing but vague ‘trade war uncertainty’ drag. There is also a small tail risk that recent geopolitical developments might plunge us into a nuclear winter. Watch this space
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