This Week In The Economy: Reassuring U.S. Jobs Report, Mixed Picture In Global Economy, Yet Another Brexit Delay?

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 respond, and 3) assess what the impact will be for consumers.

U.S. Employment Growth Rebounds In March After Disappointing Feb Data

The U.S. economy added 196,000 jobs in March, and the unemployment rate was unchanged at 3.8% — an encouraging rebound from lackluster numbers reported the prior month to alleviate concerns of a near-term slowdown in economic activity. The small increase in jobs for February was revised up from +20,000 to +33,000, while January was revised up from
+311,000 to +312,000.

Not surprisingly, the services sector drove the increase, with healthcare adding 49,000 jobs in March, while professional and technical services grew by 34,000. Manufacturing employment shrank by 6,000 in March, following just 1,000 jobs added in February.

China-U.S. Trade Agreement Enters The Home Stretch, Sticking Points Remain

China and the United States kicked-off another round of talks this week in Washington amid growing hopes of a deal to end their drawn-out trade war.

News reports indicate both sides are on the cusp of an agreement, one that would give China until 2025 to meet fulfill commitments on purchasing agricultural and energy products, and also permit U.S. companies to completely own ventures in the world’s second largest economy.

There do remain some obstacles to finalizing an agreement, however, such as the fate of the tariffs the U.S. has imposed on more than $250 billion of Chinese imports. Trump said the final deal would be “the granddaddy of them all.” He characterized the state of the talks as having addressed “a lot of the most difficult points” but that “we have some ways to go”.

The potential for a breakthrough comes as the World Trade Organization warned this week of the significant risk protectionist policies pose for the global trading system. After growing less-than-expected in 2018 due to trade conflicts and heightened economic uncertainty, the WTO projected world merchandise trade volume growth will fall to 2.6% in 2019 — down from 3.0% in 2018. Trade growth could then rebound to 3.0% in 2020 — an estimate which is dependent on an easing of trade tensions.

WTO: World merchandise trade volume and real GDP growth, 2011–2020
Annual % change

“If we forget the fundamental importance of the rules-based trading system we would risk weakening it, which would be an historic mistake with repercussions for jobs, growth and stability around the world,” the WTO said.

Good luck ….

IMF Chief: Global Economy At A Precarious Stage

Continuing the theme of a global economy balanced on a knife edge, the head of the International Monetary Fund warned this week that conditions are becoming increasingly “unsettled”.

While a recession is not expected in the near-term, IMF Managing Director Christine Lagarde said global economic activity has lost additional momentum since the beginning of the year and is at a “delicate moment.”

On the one hand, economic growth has been held back by rising trade tensions and higher borrowing costs in the second half of 2018. On the flip side, she said the world economy will benefit from the commitment of major central banks — such as the Federal Reserve — to be more patient in raising interest rates, as well as increased fiscal stimulus in countries like China.

As a result, “the expected rebound in global growth later this year is precarious,” Lagarde said and remains vulnerable to downside risks. These include country-specific issues such as Brexit, the high debt levels in some sectors and countries, uncertainty around trade policy, and “a sense of unease in financial markets.”

U.S. Retail Sales Post Surprise Drop In February

Retail sales in the United States fell unexpectedly in February, when the expectation had been for a rebound following the protracted government shutdown. February retail and food services sales in the world largest consumer market were $506.0 billion, a decrease of 0.2% from the previous month, although they are up 2.2% compared to February 2018.

Source: FTN Financial

Excluding vehicles and auto parts, retail sales fell 0.4% in February, and are down 0.3% excluding gasoline sales, and are -0.6% if you leave out both autos and gasoline sales — troubling signs for an economy that relies heavily on consumption to fuel activity.

China’s Manufacturing Sector Returns To Expansion Territory

After starting off the year at a sluggish pace that had negative knock-on effect for major exporting nations, activity in China’s manufacturing sector finally grew last month.

After three months of contraction, China’s manufacturing purchase managers index came in at 50.5 in March, an improvement of 1.3 percentage points over last month. A reading above 50 generally signifies an expansion in the sector.

However, the situation varies according to size, with the PMI for large manufacturers dropping but remaining above the 50 threshold at 51.1. Meanwhile activity increased for both medium- and small-sized enterprises, but their PMI readings remained below 50 at 49.9 and 49.3, respectively, last month.

Source: China National Bureau of Statistics

UK PM Asks To Delay Brexit Until June 30

UK Prime Minister Theresa May this week requested a further extension in its exit from the European Union until June 30, seeking more time for the government and Parliament to ratify any potential deal they are able to strike in the coming days.

The UK Parliament this week had passed a bill forcing Downing Street to request an extension to the April 12 deadline for Britain’s exit from the European Union.

Passed by just a single vote (313–312), the law forces the prime minister to present a motion to lawmakers next week on extending Article 50. May will have to lay out the length of the extension, which will be subject to the approval or disapproval by the House of Commons. If the motion is successful, she would then have to return to Brussels to request a delay to Brexit. The problem is the final decision on any proposed extension rests solely in the hands of EU leaders.

Unless EU leaders agree to grant the extension, the legal default is a hard Brexit will happen on April 12.

As part of her efforts to come up with a plan that will satisfy MPs on both sides of the aisle, May decided to negotiate directly with the opposition Labour Party. Making clear the current withdrawal agreement reached with the EU cannot be re-opened, she said the focus of talks with Jeremy Corbyn would be to agree an approach on a future relationship with the EU that delivers Brexit, can be submitted to the Commons for approval, and she could then take to next week’s European Council meeting on Wednesday.

“However, if we cannot agree on a single unified approach, then we would instead agree a number of options for the Future Relationship that we could put to the House in a series of votes to determine which course to pursue,” May said.

Eurozone Consumer Prices Continue Downward Trend, Improvement in Unemployment Rate

The European Central Bank vowed at its policy meeting in March to maintain ultra-low interest rates through this year , and for “as long as necessary” to push inflation back to its 2% target. Data released this week underscored the size of the task facing the ECB.

Euro area annual inflation is estimated to have slowed to 1.4% in March from 1.5% in February. Price deceleration is predicted for most categories with the exception of energy (buoyed by higher oil prices). Food, alcohol & tobacco costs are estimated to have increased by 1.8% last month vs. +2.3% in
February, a 1.1% jump in the cost of services (compared with +1.4% in February) and a mere 0.2% increase in the prices of non-energy industrial goods — down from +0.4% in February.

Meanwhile the unemployment rate held stable at 7.8%, maintaining the best level seen since the onset of the 2008 financial crisis. Compared toa year ago, the unemployment rate fell in all eurozone member states except Denmark and Austria where it remained stable. Youth unemployment remains in double-digits, however, coming in at 16.1% in the euro area for February, compared with 17.7% in February 2018. There continues to be a wide disparity among euro area members, with the lowest rates observed in Germany (5.6%), Czechia (6.0%) and the Netherlands (6.4%), while the highest were recorded in Greece (39.5% in December 2018), Italy (32.8%) and Spain (32.4%).

India’s Central Bank Cuts Interest Rates Ahead of Elections

The Reserve Bank of India this week cut a key interest rate, a move some have panned as political decision to boost the prospects of the ruling party in upcoming elections.

The RBI lowered its policy repo rate (the cost at which banks access short-term funding from the central bank) to 6% from 6.25%, citing subdued economic activity in both advanced and emerging market economies. Looking ahead, the RBI described risks to India’s growth outlook as “evenly balanced.”

“There are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods,” it said, adding that “the moderation of growth in the global economy might impact India’s exports.”

Chart Du Jour

The IMF released a study this week assessing the odds of another crisis in the housing markets in both advanced and emerging market economies. It concluded that the odds of a significant drop in home prices were lower in countries like the United States in 2017 compared to 10 years earlier (when the housing market meltdown occurred), while in emerging markets like China the level of risk was higher.

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

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Brai Odion-Esene

Brai Odion-Esene

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

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