This Week In The Economy: Will Trump and Xi Mend Fences? Oil’s Annus Horribilis, The Long-Term Risk Of A No-Deal Brexit
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.
All Eyes on Trump and Xi
The leaders of the G20 nations are in Buenos Aires, a continuation of the annual gathering to address global economic issues ten years on from the financial crisis. This time, however, all eyes will be on one tête-à-tête in particular — President Trump’s sit-down with China’s Xi Jinping.
Relations between the world’s largest economies have been on a downward slide since Trump took office, and a 25% increase in tariffs on $200 billion worth of goods from China is set to kick-in at the beginning of next year. Both sides are too far apart in their negotiating positions to expect a detailed agreement from this meeting that will end the trade war. The hope is the conversation goes well enough to deescalate tensions and avoid additional punitive duties being imposed by Trump on the remaining $267 billion of Chinese exports to the United States.
A lot is at stake for the global economy, with the head of the International Monetary Fund warning G20 leaders about the self-defeating nature of raising trade barriers.
“Significant risks are materializing and darker clouds are looming” — IMF Managing Director Christine Lagarde
Lagarde noted the IMF’s downgraded expectations for growth this year and next, citing rising external and financial pressures on emerging markets as well as a tangible increase in trade tensions. Global manufacturing, and China in particular, is feeling the pinch from the rise in protectionism, as the growing uncertainty and supply chain disruptions has caused many businesses to shelve investment plans.
The European Central Bank also warned in a report this week that “ downside risks to the global growth outlook have become more pronounced since May relating to a resurgence in protectionism and stress in emerging markets.”
For example, a survey released this week by the ifo Institute in Germany showed a deterioration in the business climate for Europe’s manufacturing giant. “This development was driven by markedly less favourable assessments of the current business situation,” the report said, adding that “only a few manufacturers still expect an improvement in the next six months.”
Rough Month For Global Oil Prices
Oil prices took a hammering this week, and have had a month to forget overall, with benchmark Brent crude prices falling below $60 per barrel for the first time this year. U.S. crude oil production, powered by the shale oil sector, has continued to increase at a faster rate than many expected, averaging over 11 million barrels per day in August and October. The Energy Information Administration (EIA) projects U.S. output will average 10.9 million barrels per day for all of 2018, up from 9.4 million barrels last year, and will average 12.1 million barrels per day in 2019.
In addition to more supply from Saudi Arabia and the U.S. in recent months, Russia has also been pumping out oil at record levels. On the other side of the equation, the trade war between China and the U.S. has fueled business uncertainty around the world and caused global economic activity to stagnate — exacerbating the growing supply-demand gap.
When OPEC meets on December 6, it will have to confront weakening demand prospects along with a bullish outlook for global oil supply, but the question remains if the organization will impose a cut in production to halt the decline in oil prices, and risk antagonizing Trump.
Severe Economic Hit If UK Exits European Union Without Deal
Two major reports were released this week, one by the UK Treasury and the other by the Bank of England, assessing the potential damage to the UK’s economy in different Brexit scenarios.
In its “EU Exit: Long-term economic analysis”, the UK Treasury concluded that although a soft exit from the EU will be less damaging than a hard Brexit scenario, although the pace of the UK’s economic growth will still be significantly lower in 15 years’ time as a result of the divorce.
The Treasury report said leaving the EU without a trade agreement could cause the UK economy to contract by between 7.7% to 10.7% in 2035. The Bank of England report predicted a similar scenario, saying the economy could fall up to 8%, in the case of a no deal “disruptive Brexit.”
The central bank stressed, however, that the UK banking system is strong enough to continue serving households and businesses in the event of a disorderly Brexit, with “ample liquidity” to withstand a major market disruption.
U.S. Housing Market Woes — No End In Sight
Data released this week underlined the continued struggles of the U.S. housing market, although it underscores how different the economy is today that more alarm bells are not being rung.
The Census Bureau reported a 8.9% decline in new home sales in October compared to September, with the 544,000 sales rate a whopping 12% drop-off from October 2017. In terms of inventory, there is 7.4 months supply of new homes available.
And the outlook in the short term is not much better, with the National Association of Realtor’s Pending Home Sales Index in November falling 2.6% compared to October, and down 6.7% from a year ago, making this the tenth straight month of annual decreases. With the Federal Reserve raising interest rates, NAR’s chief economist said the recent rise in mortgage rates has shrunk the pool of eligible borrowers.
Fed Signals Rate Hike To End 2018, More Caution In 2019
Speaking of the U.S. central bank, the Fed’s policymaking Federal Open Market Committee will meet for the last time this year on December 18–19 and Fed Chair Jerome Powell signaled another interest rate increase is on the books.
In a speech in New York this week, he noted interest rates are still low by historical standards — “below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”
The expectation of a December rate hike was bolstered by the minutes from the November FOMC meeting, released this week, which showed “almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon.”
Looking ahead, however, the Fed plans to implement a less pre-determined monetary policy; given the expectation of slower growth next year as the stimulus from the tax cuts fades, and protectionism continues to hinder the global economy.
“There is no preset policy path,” Powell said, and the FOMC minutes noted many Fed officials were of the view that the policy statement released after future meetings should be adjusted to include language “that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook.”
“Such a change would help to convey the Committee’s flexible approach in responding to changing economic circumstances,” it said.