Recession Fears Diminish But Uncertainty
|US Overview
Recession Fears Diminish But Uncertainty
Remains Fears about an imminent recession have faded considerably now that the Federal Reserve has cut the federal funds rate three times and the yield curve is once again upward sloping. The Fed has shown that it will do what it takes to offset the headwinds from slower global economic growth and continued uncertainty around U.S. trade policy. While data from the manufacturing sector remain weak, the overall macro data have continued to come in slightly better than expected, with job growth remaining strong and real GDP expanding at a 1.9% pace during the third quarter. Moreover, revisions to previously reported data have mostly been to the upside.
We are maintaining a cautious forecast for the next few quarters. We still assume that the earlier announced 15% tariff on $156 billion of consumer goods will kick in on December 15. Though we acknowledge the possibility that the tariff hike might be delayed further or shelved altogether if a broader-than-expected "Phase I" deal is reached.
We are looking for exceptionally modest growth in Q4, with real GDP rising at just a 1.2% annual rate. Most of the weakness is due to declines in business investment but inventories are expected to decline further, slicing 0.6 percentage points off Q4 growth. On the bright side, homebuilding is gaining momentum and may produce some additional follow through into other areas of the economy. Even with the soft quarter, real GDP remains on track for a 2.3% calendar year gain.
International Overview
Major International Economies Still Slumping
Recent data from key international economies has offered investors little respite from concerns about slowing global growth. Chinese GDP growth softened further in Q3 to the slowest pace in decades, while Eurozone Q3 GDP data released last week showed the region's economy grew a paltry 0.2% (not annualized) during the quarter. October sentiment figures from China and the Eurozone suggest both economies may have lost further momentum going into Q4, hardly an encouraging sign. The European Central Bank (ECB) made no changes to monetary policy at its October meeting, the final meeting for Mario Draghi. However, we expect the central bank to cut rates an additional 10 bps at the December meeting, the first for newly appointed ECB President Christine Lagarde, as growth and inflation continue to languish in the Eurozone. Meanwhile, the Bank of Canada dropped a subtle hint that it could cut rates, and we expect it will ultimately deliver a 25 bp rate cut in December.
On the Brexit front, Prime Minister Boris Johnson turned matters back over to the people of the United Kingdom as he successfully put forth a bid to hold an early general election on December 12. Current polling suggests his Conservative Party will win a majority, allowing them to pass PM Johnson's recently negotiated Brexit deal and move on to longer-term trade talks with the European Union. Still, a lot can change in six weeks, and there is a significant risk that the election will merely result in more gridlock and dithering rather than a path forward to the next stages of the Brexit process.
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