Economics Outlook – July 2019


While global output grew only slightly and input and output prices continued to rise, other factors indicated contraction. Most notably, employment contracted in May compared to a slight expansion in April. The decline in the US PMI was the biggest contributor to the drop in global PMI, as the United States accounts for 21.6% of global GDP. Other major economies, including the United States, the Eurozone, Japan and South Korea, also contributed to the fall in the overall global PMI.

Global Developments: Will easier financial conditions boost global equity markets? While near term we expect this rally to continue, eventually a slowdown. We believe Investors should use the current market strength to adopt a more defensive allocation—one that is more dependent on income- generating assets, such as Government bonds, high quality credit and high-dividend, defensive equities.

Equities: Equity fund outflows are near record levels. Despite the run in U.S. stocks, data shows that real money investors have been selling for most of this year. That trend continues even during what should be bouts of exuberance. The backdrop: The drawdown in stocks came as the S&P 500 and Nasdaq reached new all-time highs and the U.S. saw a raft of strong economic data, including retail sales and jobless claims, as well as above-average corporate earnings results.

Energy: Oil supply/demand balance will tighten in the months to come. Geopolitical tensions will also provide support for oil prices.

Global Developments: Global government bond yields ex-US are at record low. he 10-year Treasury yield fell to around 2 percent, its lowest level since November 2016. Meanwhile, the pool of negative-yielding government bonds around the world hit a fresh record high of $13 trillion.

Equities: Here are four scenarios for the Fed and the US-China trade deal (at G20).


Business optimism has also become more subdued, with sentiment about the year ahead down to a new series low amid intensifying worries about tariffs, geopolitical risk and slower economic growth in the months ahead.

The United States: Growth in the US employment market decelerated sharply in May, as the economy added just 75,000 jobs – holding the unemployment rate steady at 3.6%, matching its lowest level since 1969.Trump says deal reached with Mexico to avert tariffs – as it happened The job creation numbers came in around 100,000 below expectations, signalling that despite marking the 104th straight month of gains, employers are pulling back as they review the effect of slowing global growth and trade tensions with China, the EU and Mexico.

The United States: When the Fed pre-emptively cut rates in the 1990s (as it is expected to do this year), the manufacturing sector was in much worse shape than it is now.

The United States: new home sales slumped 7.8% to a seasonally adjusted rate of 626,000 in May. That was the slowest rate of sales for that metric since December 2018. It fell below the 683,000-pace expected and was led by a plunge in sales in the West.

Short-term interest rates are headed down because of expectations that the Federal Reserve will cut the federal funds rate next month. The Fed probably will lower the rate, at either its July 31 or September 18 meeting. The central bank wants to counteract the slowdown in manufacturing caused by the trade war.

The United States: Unless Congress lifts the debt ceiling, analysts expect the US Treasury to run out of cash in October.


The Eurozone: Services continue to support private-sector growth in the Eurozone. Behind the scenes of a slowing eurozone economy, two diverging forces become apparent. While domestic demand and services sectors are well supported by thriving labour markets, industrial sectors—usually the engine of the eurozone economy—suffer from external headwinds.

The pace of eurozone economic growth remained subdued in June but edged up for a second successive month to reach a seven-month high. Growth was driven by the service sector, which helped offset an ongoing manufacturing downturn.

The Eurozone: The Eurozone’s consumer sentiment continues to soften. Sentiment deteriorated in both services and manufacturing during the month. Companies generally reported that a weaker economic outlook, uncertainty, geopolitical issues and intensifying competition would limit growth in coming months.

The Eurozone: The Citi Economic Surprise Index for the Eurozone has been grinding high.

Among the big eurozone economies, Spain continues to be in the lead. It grew 0.6 percent in the last quarter of 2018. Growth in France was lower, but still positive, while it stagnated in Germany and contracted in Italy. Italy is technically considered in a recession following contractions in two consecutive quarters.3 Recent preliminary flash estimates point to a stabilization of growth rates for the eurozone in the first quarter of 2019.


From a European perspective, the key risks of Brexit are clear. A recent Deloitte survey of 262 German corporates shows that companies most fear higher complexity and costs due to different regulations in the future (figure 4). The second-biggest concern is reduced export opportunities, again due to regulatory differences, but also due to possible tariffs. Nonetheless, corporates also see some opportunities in the form of new business potential through relocations to Germany or other parts of Europe as well as less through competition in the European or German markets.


Japan’s leading economic index (LEI) was 95.9 in April, up from 95.7 in March and marginally above the 95.5 reading anticipated. The LEI is a composite index is based on 12 economic indicators, but as many components have already been reported and the index remains muted from a long-term perspective the release failed to boost sentiment much on the day.

Japan: The Bank of Japan (BOJ) continues to face an uphill battle to achieve its 2% inflation target; yet left its policy unchanged when it met last week, opting I think to save some if its dwindling ammunition.


China: House prices in 70 large- and medium-sized cities rose 0.7% in May in month-on-month terms according to a weighted average index calculated by Thomson Reuters from data issued by the National Bureau of Statistics (NBS). The print was above the 0.6% increase in April. According to the NBS, the sale prices of newly constructed residential buildings increased in 67 cities (67 in April). House prices rose 10.7% annually in May, matching April’s result. Annual average growth in house prices increased from 8.3% in April to 8.5% in May, the strongest result in 17 months.

China: Industrial production increased 5.0% year-on-year in May, below the 5.4% rise registered in April. The print undershot market expectations of a 5.4% increase and represented the weakest expansion since 2002. May’s weak print reflects headwinds stemming from the ongoing trade war with the United States and subdued global demand.

China: In May, nominal retail sales grew 8.6% on an annual basis. The print was above both the 7.2% increase in April and market expectations of an 8.1% rise. May’s acceleration mostly reflected stronger sales of food and household appliances as well as a rebound in sales of cars and clothing and footwear. Conversely, sales of oil and oil-related products posted a contraction in May. While May’s acceleration in retail sales growth is good news for the economy, the rise mostly reflected seasonal distortions related to the Labour Day.

China: Urban fixed asset investment expanded 5.6% year-to-date in May, below the 6.1% increase in January–April. Moreover, the figure undershot the 6.1% increase expected by market analysts. The result reflected a deeper contraction in the primary sector as well as softer growth in the tertiary sector. Conversely, the secondary sector expanded at a faster pace compared to the previous month. Moreover, property investment growth receded from April’s nearly four-year high.

China: Consumer prices were flat from the previous month in May, following April’s 0.1% increase. The reading mostly reflected that higher prices for food and clothing and footwear were offset by lower prices for recreation, education and cultural services. We believe the surge in fruit and egg prices will be short-lived and could subside in summer when supply increases, while pork prices could rise further due to a sharp decline in hog stock as a result of the spread of African Swine Fever (ASF).

China: In the last few months, monetary authorities had preferred to use other tools to cope with the squeezing effect of capital outflows on domestic liquidity as additional easing could have exerted further depreciation pressures on the Chinese yuan. However, as liquidity injections have proven to be insufficient to improve financial conditions.


Australia: The NAB monthly business survey for May showed business conditions continuing to soften, with reported weakness particularly pronounced in the wholesale and retail sectors. n marked contrast, the business confidence index enjoyed a big, seven-point post-election increase. That was the largest monthly jump in the index recorded since 2013, although the accompanying analysis from NAB cautioned that other forward-looking indicators suggested that the bounce was ‘likely to be short-lived’.

Australia: The Westpac-Melbourne Institute Index of Consumer Sentiment (pdf) fell 0.6 per cent to 100.7 in June from 101.3 in May. Soft consumer sentiment is consistent with last week’s retail trade release and the retail outcomes reported in the NAB monthly survey (above). Interestingly, survey responses reportedly showed a marked drop-off after the RBA rate cut, with responses collected before the decision having a combined index read of 106.8 compared to an index read of 95.5 for those collected after the June meeting.

Australia’s unemployment rate was unchanged at 5.2 per cent in May (seasonally adjusted). The trend unemployment rate was likewise unchanged at 5.1 per cent. Underemployment rose from 8.5 per cent in April to 8.6 per cent in May, leaving the underutilisation rate at 13.7 per cent (seasonally adjusted).

Australia: The number of employed persons increased by 42,300 persons in May, with an increase of 2,400 in full-time employment and an increase of 39,800 part-time. That was a much stronger rise than the consensus forecast, which had called for an overall increase of just 16,000.

Australia: Over the past year, full-time employment has now increased by more than 266,000 while part-time employment has grown by almost 94,000 over the same period. The participation rate has now risen to 66 per cent, a new high.

Australia: The average monthly rate of employment has been running at more than 27,000 persons over the past 12 months, delivering sizeable gains in both full-time and part-time employment, and employment growth is currently at close to an annual rate of three per cent. That in turn has encouraged more Australians to enter the labour force, pushing up the participation rate to a new record high.

Australia: The trade tensions were the ‘straw the broke the camel’s back’ in terms of moving rates down; but having broken the mould it will now be easier for the RBA to ease further, and indeed this is what the market is expecting.

Source:  The material and research presented has been sourced from Merlea Investments.

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