。Economic Research
Global Data Watch
February 15, 2019
JPMorgan Chase Bank NA
Bruce Kasman(1-212) 834-5515
bruce.c.kasman@jpmorgan
David Hensley(1-212) 834-5516
david.hensley@jpmorgan
Joseph Lupton(1-212) 834-5735
joseph.p.lupton@jpmorgan
The primary source of the growth downshift—slower business
spending in response to political conflicts that have weighed
on confidence—is unlikely to fade anytime soon. If anything,
softer global profit growthlinked to slower nominal GDP
gains is likely to reinforce this drag. We are encouraged,
however, that a backdrop of accommodative policiescush-
ioned the business sector adjustment. In the wake of the
FOMC’s dovish tilt, this week’s deal to avert a US govern-
ment shutdown, combined with signs that Brexit and US-
China trade negotiations will be extended, is bolstering finan-
cial markets. On balance, we expect the current weakness to
prove temporary.
Less Fed now; more growth, inflation later
Having started the year anticipating four Fed hikes, we now
expect no Fed tightening until December. While this shift is
linked to slower-than-expected US growth and increased
global risks, we also see theFed signaling greater tolerance of
an inflation overshoot. We have been highlighting the impli-
cations of an easier Fed for EM central banks that are in the
midst of a broad-based dovish tilt. Pressure is building for a
broader shift in rhetoric from the ECB and BoJ where poli-
cymakers feel constraints on easing and concerns about per-
sistently low inflation. It is also important to look forward and
recognize a more accommodative stance of global monetary
policy should supportfinancial conditionsand bolsterprivate
sector confidence. With hints of this shift beginning to take
hold, we are altering our 2020 global outlook by raising the
US growth and core inflation forecast.
China trade bounce tempers concerns…
China’s merchandise imports and exports collapsed in No-
vember/December in an exaggerated version of what hap-
pened across the rest of EM Asia. The declines were particu-
larly deep in the capital goods sector. This has made us nerv-
ous about 1Q global capex, as has the continued nosedive in
our global investment goods PMI through January. With
capex possibly contracting in 1Q, we may see even weaker
growth in global IP and GDP than we expect. For the region,
the last time exports were falling at this pace was back in
2H14-1H16 when global industry decelerated to a soft 1% ar
on the back of a retrenchment in business equipment spend-
ing. However, the severe declines in China raised fears that a
moreextreme downshift in global (or Chinese) growth might
be taking hold. This week’s January China trade data temper
the latter concern somewhat. Indeed, exports bounced strong-
ly and essentially returned to the October level.
The extreme volatility of the China data makes it hard to read
their signal. We are unsure of the cause; we had thought it
might reflect improper seasonal adjustment for the shifting
timing of the Lunar New Year but we find no evidence of that
for China or the rest of EM Asia. For now, one option is to
rely more heavily on export data from EM Asia ex. China
(“EMAX”), which exhibit nearly as good a correlation with
global capex as China’s exports. Available data point to a
continued downtrend in EMAX exports through January.
…as does a pickup in TSF credit growth
Reinforcing China’s qualified good news on January trade,
TSF credit growth picked up to 10.4%oya, the first rise since
mid-2017. Bank loan growth increased smartly, though this
typically happens in January. More notable was the growth in
“shadow credit,” which contracted all through last year, and in
bond financing (Figure 3). We expect TSF growth to rise by
1%-2%-pts in 2019 as officials take additional steps to pro-
mote bank lending and ease the clampdown on non-bank fi-
nancing. One disappointment in this week’s January data was
the continued monthly declines in PPI, which are aggravating
the downturn in manufacturing profits. The soft inflation
prints reinforce our call for more monetary easing. We expect
7-day reverse repo rate cuts (possibly by 5-10bp) in March,
and a 100bp RRR cut in April. The dovish shift from the Fed
further clears the way for the PBOC to ease domestic mone-
tary conditions.
Japan’s economy effectively stalled
Japan’s GDP expanded 1.4% ar in 4Q18, well short of the
2.6% drop recorded in the previous quarter. The surge in
manufacturing output had led us to expect a much stronger
performance. GDP now looks to have stagnated over 2018 as
a whole (4Q/4Q basis). This likely exaggerates the weakness
in the underlying trend; nonetheless, the message remains that
the economy is struggling to grow, especially against a slug-
gish global backdrop. This is all the more concerning with an
increase in the VAT looming later this year and core inflation
still hovering near zero. We maintain our forecast that GDP
will expand at a 1% ar in 1H19 but the risks skew to the
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1000
1500
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2500
2016201720182019
Flows in Bn CNY, nsa
Figure 3: Select China TSF components
Source: J.P. Morgan
Corp bonds
Trust, entrust loans
and bankers acceptances
Bank loansEconomic Research
Global Data Watch
February 15, 2019
JPMorgan Chase Bank NA
Bruce Kasman(1-212) 834-5515
bruce.c.kasman@jpmorgan
David Hensley(1-212) 834-5516
david.hensley@jpmorgan
Joseph Lupton(1-212) 834-5735
joseph.p.lupton@jpmorgan
downside. Next week’s reports on the January trade balance
and February business surveys will give us more information.
EMU: Waiting for growth
The Euro area industrial sectoris in recession, contracting
2.1%oya last quarter. The central question is: what does this
say about GDP, and what is the signal for 2019 While GDP
held up better than IP last year, the steep loss of momentum in
IP at year-end (plunging 5.3% annualized in 4Q18) along with
the continued declines in the all-industry PMI in January does
not bode well(Figure 4). We are confident that a recovering
auto sector will give IP a sizable boost, withnew car registra-
tions jumpingin January almost back to normal. We also take
comfort in regional employment growth, whichedgedback up
last quarter after dropping steeply in 3Q18. However, if
growth is to firm, we need to see the PMIs not just stabilize
but recover—starting with next week’s flash reading for Feb-
ruary. We expect the French flash PMI to close half the gap to
the stronger INSEE and Bank of France surveyreadings, lift-
ing the Euro area aggregate by 0.6pt to a level consistent with
1.25% growth. We also expect the German IFO to recover
partially from January’s slump.
Neighbors defy Euro area gravity
In contrast to the Euro area, growth in the surrounding econ-
omies has held up better and is supporting a tightening bias
among central banks. In the Scandies, strong growth and in-
flation hovering around target combined with a negative poli-
cy rate kept the Riksbank this week on a path to hiking in
2H19. Recent activity and inflation data in Norway have also
been encouraging and we expect the Norges Bank to hike in
March. In Central/Eastern Europe, although the global slow-
down has weighted on exports, strong wage growth, EU-
funded investment outlays, andexpansive fiscal stanceshave
supported domesticdemand. Moreover, although energy pric-
es are declining, overheating pressures are evident in rising
core inflation and deteriorating current accounts. We expect
the Czech central bank to lead the group with a hike next
quarter, followed by the