Autumn has begun with a deluge of rain but holidaymakers will never again escape the British weather with Thomas Cook. Weighed down by debt, a worrying aspect of the 178-year-old travel giant’s demise is, in the view of Murray Gunn, head of global research at Elliott Wave International, that it happened when the economy just started slowing. Mr Gunn goes on to make the stark warning that as "the economic slump deepens, we expect many more established and historic names to disappear".
Eurozone Purchasing Managers' Index (PMI) data this week gives cause for concern the global economy is indeed on the verge of a downturn. Manufacturing PMI data has fallen to its weakest level in seven years – after the nadir of the eurozone crisis – and services PMIs are also at an eight-month low. Against the backdrop of falling export orders and a declining backlog of work, UBS economist Reinhard Cluse and his team write that slack may be increasing in the economy and that previous estimates for eurozone growth may be too high. The European Central Bank projects 1.2 per cent next year but UBS recently cut its 2020 eurozone growth forecast to just 0.7 per cent. UBS also notes the German composite PMI is now below the crucial 50-point mark, which it believes should fuel talk of fiscal stimulus in Europe’s biggest economy.
Across the pond, lively goings on in the United States repo market (where banks give bonds as collateral for cash) raised the spectre of the 2008 crisis, although thankfully the problem hasn’t escalated out of control this time. George Lagarias, chief economist at Mazars, credits the Fed with doing its job in committing to inject $75bn of liquidity each day until mid-October. The demand to borrow was driven by a major US Treasury bond issuance and a September deadline for corporate tax payments, so Mr Lagarias feels the spike in the repo borrowing rate is manageable with the Fed’s intervention and differs from the crisis 11 years ago, when the issue was banks had stopped trusting one another.
Where Mr Lagarias does see cause for concern is in the politicisation of central banks, notably President Trump’s criticism of the Federal Reserve, and he upholds the principle of independent central banks that “can effectively fight off crises”. Conversely, he says, "central banks subordinate to the executive may not only cause an erosion of faith in the system, but can also be used as arms in a currency war, an insidious form of trade war". Given the lesson from the last week is strong central bank action can calm traders quickly, he says: "Investors should be wary of any signs that balance [of independence] might be changing."
With the US election on the horizon in 2020, there will probably be enormous pressure on the Fed to be ever more dovish on monetary policy – especially with some indicators pointing to a global recession. American GDP figures on the 26 September will be watched closely and personal income and spending data on Friday will give insight into the mood of the all-important American consumer.
Some economists aren’t confident, however. Ken Orchard, portfolio manager of the T. Rowe Price Diversified Income Bond Fund, described US purchasing managers’ index data last week as “arguably the worst in 10 years – due to the softness in confidence and new orders”, in both America and the eurozone he says that a “positive feedback loop is being formed between lower growth and weaker confidence, amplifying both”.
Next week’s economics…
Often in the UK there is a link between sentiment in the economy and house prices, so data from the Nationwide Housing index on 28 September will be worth watching out for ahead of the latest GDP figures on 30 September, which coincide with mortgage approval data. What toll the political Brexit debacle is taking on industry might be revealed by UK manufacturing PMI data on 1 October, although any signs of slowdown are more likely due to the woes of export destinations than self-inflicted damage thanks to Westminster.
Germany’s worrying slowdown may be further evidenced by the change in its unemployment figures due to be published on 30 September. Being heavily exposed to the Chinese economy, German industrialists will be paying close attention to China’s manufacturing PMI data the same day, as this will surely affect its imports of capital goods from Germany in the coming months.
Staying in Asia, Japan follows on from its PMI data this week with further releases on its industrial production (29 September) and Tanka manufacturing index (30 September). Japanese equities have performed strongly in September, but with policymakers having taken comprehensive stimulus measures three years ago, there is little scope to boost companies’ prospects further if data disappoints.
Japan, along with the rest of the world, must hope that trade disputes between America and China are resolved sooner rather than later, to end the negative knock-on effects. Global growth may still require stimulus to get back on track and Mr Orchard thinks the Fed must play a leading role, although there is a low probability of the combination of aggressive rate cuts from the US and fiscal policy expansion from the eurozone and China that could really kick-start the world economy. In the absence of such a blend of policy responses in major regions, Mr Orchard thinks some form of recession is inevitable.
