Macro insights

Chinese growth at three-decade low, Brexit deal agreed but uncertainty continues

Better September data not enough to arrest China’s growth slowdown.

A moderate recovery in September activity failed to prevent China’s GDP growth from falling to 6% - its lowest in almost three decades. Trade and trade-related manufacturing sectors – casualties of the trade war – have continued to lead the weakness, while domestic-oriented activity has held up better, supported by accommodative government policies. The bifurcation in the economy has therefore intensified. Despite some short-term positives in industrial production and retail sales growth, Beijing should not take any chances with the overall slowing economy. Even if an interim trade deal is on the way, the existing tariffs – which are unlikely to be rolled back – will continue to exert downward pressure on the Chinese economy.

Internally, the risk of trade weakness spreading to domestic demand cannot be downplayed given the increasing evidence of supply-chain readjustments. The worsening deflation in factory gate prices is an indication that a critical part of the economy is still struggling to get back to growth. Policy-wise, this is not the time for Beijing to take its foot off the gas, and we expect further easing measures in the coming months. We maintain our below-consensus growth forecast of 6.1% for 2019.

US Federal Reserve Vice Chair Richard Clarida said on Friday that the Fed would “act as appropriate” to sustain the country’s economic expansion, with risks around the outlook remaining elevated. These were some of the last official words from the Fed as it goes into a purdah period ahead of next Wednesday’s meeting. The tone of these comments was in line with probabilities inferred from overnight interest swap markets suggesting an 87% chance of a 0.25% rate cut next week. This is also our expectation, alongside a further discussion of balance sheet policy and a resumption of organic balance sheet growth.

US data this week is light, with little to guide on the outlook for activity. Developments around trade policy could again prove market-moving. However, Chinese authorities have started to sound more positive on the outlook for a partial deal and we expect uncertainty to stretch towards the Asia-Pacific Economic Cooperation meeting on 16 November.   

Last week saw the UK and European Union (EU) agree a new Brexit deal. An extraordinary session of Parliament on Saturday was intended to provide clarification of the path forward – either acceptance or rejection of the deal. In the end we got neither. An amendment aimed at insuring against an accidental no-deal exit at the end of this month - the Letwin amendment - was passed early in the session and the government reacted by pulling its vote on the deal. As such, the 11pm deadline imposed by the Benn Act came and went without Parliament having agreed a deal.

Prime Minister Boris Johnson followed the letter of the law, sending a letter to the EU requesting an extension of Article 50. He left this letter unsigned and sent two other letters, one explaining that he thought a further extension would be damaging. EU President Donald Tusk has acknowledged receipt of the UK’s request for extension, although we do not expect a quick response. As a result, Brexit uncertainty remains elevated.

This week will see the Prime Minister try to pass his deal today – although this may run into procedural difficulties, with House Speaker John Bercow due to make a decision around 3.30pm today – and the Withdrawal Bill tomorrow. Passage of these votes would see a race to implement all the required legislation by next Thursday. The EU might pass a short technical extension if this deadline appears too testing. Otherwise, we expect the EU to approve a longer extension, which we think will likely include a UK election. Confusion and uncertainty remain high in the UK for now and can be expected to impact asset markets. However, with the 31 October deadline looming next week, confusion is likely to give way to a more certain outlook over the coming days.

In the Eurozone, attention will also focus this week on business confidence data, with October flash Purchasing Manager Indices (PMIs) on Thursday and the German Ifo survey on Friday. It will be particularly interesting to see if they have reacted to the slightly positive news regarding the US/China trade war, or whether contagion to the services sector has been accentuated. This week will also be European Central Bank (ECB) President Mario Draghi’s last meeting. We expect no policy decision, but a likely defence of the much-criticised September stimulus package and some details on the composition of asset purchases, heavily biased to sovereign purchases and a smaller share of private sector purchases. The dissenters on the Governing Council are showing no sign of backing down. With a generic lack of confidence in the capacity of monetary policy to provide meaningful net support to the economy, given the rising focus on negative side-effects, we think we have touched the peak of monetary activism in the euro area. We expect the ECB to stay put in 2020, baring a significant deterioration of the outlook.

Elsewhere in Europe, Spanish political tensions are flaring up again after the Supreme Court sentenced nine Catalan separatist leaders to prison. Protests and violence in Catalonia could complicate further the formation of a new Spanish government after the elections on 10 November. The Socialist party PSOE has been losing ground lately and the downward trend could accelerate, as PSOE is usually perceived as too soft on the pro-independence movement among non-Catalan voters. 


Upcoming events

US:  Preliminary durable goods orders, preliminary manufacturing and services PMIs (Thursday), final Michigan consumer sentiment (Friday), US officials Steven Mnuchin and Robert Lightizer will hold a call with Chinese Vice-Premier Liu He (this week)

Euro Area: Preliminary Eurozone consumer confidence, French INSEE manufacturing confidence (Wednesday), flash Eurozone composite PMI estimate, flash Eurozone, French and German manufacturing and services PMIs estimates, ECB announcement, Spanish unemployment (Thursday), German Ifo business climate index (Friday)

UK: Potential meaningful vote and legislation implementation of new Brexit deal, vote on the legislative agenda outlined in the Queen’s speech (this week), Bank of England’s Andy Haldane speech in Frankfurt (Monday), public sector net borrowing, quarterly CBI Industrial Trends Survey (Tuesday), Prime Minister Johnson gives evidence to the Parliamentary Liaison Committee (Thursday).

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