This Week In The Economy:National Emergency Declaration Won’t Automatically Reopen Govt, Is The Eurozone Heading For A Recession?

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

The budget standoff — and accompanying U.S. government shutdown — between President Trump and Democrats is entering its 21st day, with both sides fully entrenched in their positions. As a result, Trump is considering a national emergency option, in which he declares the situation at the United States’ border with Mexico is a crisis and bypasses congressional approval to access federal funds for the wall.

The plan being crafted would use the Army Corps of Engineers and tap a portion of their $13.9 billion in funding to build the barrier along the southern border. The money was originally set aside to fund civil works projects all over the country through fiscal year 2020, but it has not been used yet. A national emergency declaration would allow the president to take the money from these projects and use it to build the border walls.

While U.S. presidents do have the authority to declare anything a ‘national emergency’, the 1976 National Emergencies Act mandates a formal declaration by the president, and requires the citation of the specific statutory authority being sought. An emergency declaration lapses after one year unless formally renewed by the president.

Bypassing Congress to secure the funds for the wall won’t automatically reopen the government, however. The House and Senate will still need to pass funding bills for the government agencies, which will then need Trump’s signature — something which is not a forgone conclusion.

Germany, France, and Italy rank first, second, and third in terms of the Euro Area’s largest economies. There are now worrying signs all three might be headed for a slowdown in economic activity.

Starting with Germany, data released this week showed new orders for manufactured goods fell 1% in November from the previous month, and are down 4.3% compared to November 2017. Highlighting the possible impact of increased trade protectionist policies, domestic orders increased by 2.4% while foreign orders decreased by 3.2% from October.

Factory production fell as a result, given the weak demand discussed above. Excluding energy and construction, German industrial production was down by 1.8% in November — by industry, the production of capital goods (e.g tools, machinery, and equipment) decreased by 1.8% and the production of intermediate goods (a product used to produce a final or finished good) by 1.0%. The production of consumer goods fell 4.1%.

In France, manufacturing output declined by 1.4% in November 2018 compared to the same month a year ago, with the production of machinery and equipment down 2%. In Italy, industrial production in November fell by 1.6% compared with the previous month, and contracted by 2.6% compared with November 2017.

The drop in eurozone wholesale prices is only going to squeeze profit margins even further, discouraging businesses from expanding or making additional investments. The European Commission’s Business Climate Indicator for the Euro Area fell in December, with the report noting that “Managers’ assessment of both past and expected production deteriorated markedly, as did their appraisal of both their overall and export order books; also their views on the stocks of finished products worsened to some extent.” The Commission’s Economic Sentiment Indicator also declined significantly in December, with deteriorating confidence witnessed among business and consumers:

“Consumer confidence decreased markedly (−2.3) due to a deterioration of all its components, i.e. consumers’ unemployment and savings expectations and their views on their future financial situation and the future general economic situation; the decrease in the latter was particularly strong.” — European Commission

Chinese and U.S. government officials met earlier this week in Beijing, as both sides seek to take advantage of the ongoing trade war truce to reach an agreement. In a positive sign, Chinese Vice Premier Liu He is expected to visit Washington later this month or in early February to continue talks with senior U.S. officials.

Much has been made of the impact from the U.S.’ punitive import duties on China’s economy, and this week the government in Beijing unveiled tax cuts for small and medium-sized businesses worth $29 billion a year over the next three years. The package includes a cut in the corporate-income tax and value-added tax, among others. The Peoples Bank of China, its central bank, will also start lending money to banks using a new policy instrument in late January.

The ‘Medium Term Lending Facility’ lends cash for up to three years, and is aimed at encouraging banks to in-turn lend to small and private companies facing credit shortages.

The UK Parliament will vote January 15 on the deal negotiated by Prime Minister Theresa May for the country’s exit from the European Union. As things stand, May is expected to lose that vote and she will be forced to put forward a plan B within three days if that happens, a requirement imposed by a procedural amendment passed by the House of Commons this week.

The question is will May follow-through on her ‘no deal is better than a bad deal’ mantra? Japan’s Prime Minister Shinzo Abe certainly hopes not, and the head of the world’s third largest economy was in London this week to make that point clear.

“It is the strong will of Japan to further develop this strong partnership with the UK, to invest more into your country and to enjoy further economic growth with the UK,” he said, adding, “That is why we truly hope that a no-deal Brexit will be avoided, and in fact that is the whole wish of the whole world.”

Meanwhile the knives are being sharpened across the aisle, with Labour Party Leader Jeremy Corbyn ramping up calls for another general election should the government lose the vote next week. This would be triggered by him tabling a motion of no confidence once he is certain there are enough votes. If a majority of lawmakers back the no confidence motion, the government has 14 days to try and win another confidence vote — if it is unsuccessful, then a general election will be held.

After raising short-term interest rates at their last meeting of 2018, Federal Reserve officials expressed a note of caution about 2019’s economic prospects, and signaled a shift to a more data-dependent path for monetary policy this year.

This approach was confirmed in the minutes of the December Federal Open Market Committee meeting released this week. It showed participants believed recent developments, including financial market volatility and the increased concerns about global growth, “made the appropriate extent and timing of future policy firming less clear than earlier.”

“ Against this backdrop, many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming,” the report added.

U.S. data released this week showed job openings fell to 6.9 million in November 2018 from 7.1 million in October, while the number of hires fell to 5.7 million from 5.9 million. This is still better than the 5.5 million hires made in November 2017. The number of people quitting their job (a sign of confidence in the economy and their employment prospects) dipped to 3.4 million compared to 3.5 million in October but is still above 3.1 million in the same month a year ago.

Meanwhile inflation pressures remain muted, with U.S. consumer prices declining by 0.1% in December after being unchanged in November, driven by a 7.5% drop in gasoline prices. The Consumer Price Index was up 0.2% in December excluding food and energy prices. The CPI increased 1.9% for the 12 months ending December; the first time the 12-month change has been under 2.0% since August 2017.

The World Bank latest Global Economic Prospects report slashed its forecast for global economic growth as slowing trade and investment, as well as rising interest rates, sap momentum out of economic activity. It now expects global expansion of 2.9% this year, down from 3% in 2018, and a reduction of 0.1 percentage points from its June forecast. Growth in China was revised downwards by 0.1% to 6.2% while that in the US was left unchanged at 2.5% and Japan was revised up by 0.1% to 0.9%.

“ The outlook for the global economy in 2019 has darkened,” the global development agency said.

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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