Economic Outlook – 2 February 2020


  • Growth in Q4 was boosted by a sizable 1.5 % contribution from net exports, as a modest increase in exports was offset by a steep decline in imports. The threat of additional tariffs in December likely led many importers to pull purchases forward into earlier in the year, which helps explain the dramatic decline. That noted, business fixed investment continued to be a drag, owed to the combined forces of the trade war, the Boeing 737 MAX sidelining, and a pullback in the energy sector. However, consumer spending remained firmly in positive territory, and an upturn in government purchases provided some additional support. Furthermore, lower mortgage rates spurred the second straight quarterly rise in residential investment.
  • Residential construction and new and existing home sales have reversed course and are now on a positive trajectory. New home sales slipped 0.4% in December, but ended the year up 10.3% compared to 2018. The widespread improvement in the housing data can also be seen in the homeownership rate, which climbed to 65.1% during Q4, the highest since 2013.
  • Both housing and the broader economy should continue to be supported by lower interest rates moving forward. The first FOMC meeting of 2020 yielded no change to the federal funds rate, with officials choosing to maintain the current 1.5% to 1.75% target range. Given the effective federal funds rate has been trading closer to the bottom of that range, Fed officials lifted the interest rate paid on excess reserves by 5 bps in order to incentivize commercial banks to keep more reserves parked at the Fed and help keep the effective rate closer to the middle of the target range.
  • As expected, the Federal Reserve’s monetary policy committee voted at its January meeting to keep its short-term benchmark lending rate in a range of 1.5% to 1.75%. After cutting rates three times last year to address a slowing economy, the Fed has now kept rates steady for two straight meetings. The central bank’s post-meeting statement was virtually unchanged from the one issued following the Fed’s December meeting, but the policymakers did note that the rise in household spending has dropped from a strong pace to a more moderate level.
  • The consensus is for the Fed to hold-off on any adjustments to the federal funds rate for the rest of this year. While business spending remains weak (durable goods orders jumped 2.4% in December, but excluding defense, fell 2.5%), better days could be ahead as the fog of trade uncertainty begins to dissipate. Consumer spending should continue to be solid and in the final month of the year, personal spending rose a solid 0.3%. Meanwhile, inflation continues to gradually move towards the Fed’s 2.0% target. The PCE deflator, the Fed’s preferred inflation measure, rose 1.6% year-to-year during December. With sturdy GDP growth and modest inflation pressures, the Fed will likely be content on keeping rates on hold for the remainder of 2020.
  • Amid an ongoing US Senate impeachment trial, President Donald Trump signed into law the US-Mexico-Canada agreement, an update to the North American Free Trade Agreement that reduced trade barriers between the three nations in the early 1990s. The pact is expected to increase US gross domestic product by about 0.35% over the long term as trade uncertainties are reduced, according to the US International Trade Commission. Regarding the impeachment trial, the proceedings could come to an end as early as today, with the final vote expected to fall far short of the two-thirds majority required to remove the president from office. 
  • The major US equity benchmarks lost ground for the week amid growing concerns about the impact of the coronavirus on global economies. The Nasdaq Composite Index held up the best, while the mid- and smaller-cap benchmarks had the weakest results. Performance was mixed for the month, the Nasdaq recorded positive results, but the other major benchmarks finished January with flat or negative returns.
  • Last week was busy for quarterly earnings reports, and strong results by some of the largest US companies helped offset the market’s losses for the week. Apple and Microsoft, the two largest companies in the S&P 500 by market capitalization, reported better than expected earnings. Apple was bolstered by strong iPhone sales, while Microsoft was supported by its Azure cloud-computing business. rallied after beating earnings expectations and recording solid growth in its Prime membership program. 
  • The week’s risk-off environment supported higher-quality segments of the fixed income market. Treasuries rallied, and the yield of the benchmark 10-year Treasury note fell to its lowest level since early September 2019.
  • US ISM Manufacturing is due out this week, which will not immediately reflect the effect of the virus on countries and value chains outside China as it takes some time to materialize.
  • Friday’s US jobs report for January should  also still  paint  an  upbeat  picture  of  the  US  labour market situation, for growth in non-farm payrolls is expected.


  • As expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) left the policy rate unchanged. The vote was 7 to 2, as two MPC members wanted a rate cut. Market participants had been highly divided in their expectations of this policy decision, pricing in a likelihood of around 50.0% for a rate cut. The pound strengthened on the news. According to the BoE, the most recent indicators pointed to global growth stabilising and global business confidence had picked up. In the UK, business surveys had picked up notably and investment intentions appeared to have recovered. That said, activity growth in the UK had slowed last year and was expected to have been flat in Q4. On the other hand, the unemployment rate had remained low and stable, and employment growth had picked up.
  • Members of the European Parliament ratified the Brexit Withdrawal Agreement by 621 to 49 in Brussels. The United Kingdom formally left the European Union last week and entered a transition phase until the end of 2020 during which it will remain in the single market and customs union but no longer be represented in EU decision-making bodies. Much now hinges on trade negotiations and the essential tradeoff between regulatory alignment and market access that will likely be the crucial issue in the 2020 Brexit battle.
  • British mortgage approvals hit their highest level in nearly two-and-a-half years in December, according to BoE data that added to signs of an economic pick-up since last month’s election. The number of mortgages approved for house purchase rose to 67,241 in December (higher than the consensus forecast of 65,700 in a Reuters poll of economists) from 65,514 in November.


  • In the eurozone, flash estimates showed Q4 GDP quarter-on-quarter growth at 0.1% compared to 0.2% the previous quarter, below expectations. The corresponding year-on-year growth rates were 1.0% compared to 1.2% in the earlier period. Country-specific estimates for France and Italy showed both economies unexpectedly shrinking by 0.1% and 0.3% on a quarterly basis respectively. Only Spain showed a more resilient picture, growing at 0.5% compared to the previous quarter.
  • Germany’s economy ministry raised its forecast for 2020 growth to 1.1% from a previous 1.0%, citing an improved trade outlook, strong domestic demand, and a higher number of working days this year. Peter Altmaier, the minister, said that the recovery had reached a “turning point” after two years when forecasts were revised down and that “we are now seeing a silver lining on the horizon.” The ministry said the government would also step up investment to EUR 162.4 billion over the next four years, one-third more than in the previous parliament, as reported by the Financial Times.
  • The eurozone’s unemployment rate dropped to 7.4% in December, its lowest level in almost 12 years. Economists polled by FactSet had expected 7.5%. The number of jobless fell by 592,000 last year to 12.25 million people. In a further positive signal for the eurozone economy, the European Commission’s economic sentiment indicator rose in December to a five-month high, reflecting improved sentiment in the industrial and construction sectors. The consumer and services sectors were flat.
  • European stocks fell as the rapid spread of the coronavirus in China sparked fears of a pandemic and a hit to global economic growth. The pan-European STOXX Europe 600 Index ended the week down 2.28%, while Germany’s exporter-heavy DAX Index fell 3.47% and the CAC-40 Index in France dropped 2.94%.
  • Germany industrial production is out on Friday.


  • On Thursday last week, the World Health Organization declared the coronavirus outbreak that originated in Wuhan, China a global public health emergency. The WHO praised Chinese efforts to contain the spread of the virus, which thus far has claimed 213 lives worldwide while infecting nearly 10,000, according to the latest official tally. Later, the United States issued its most serious travel warning to US citizens, advising them to avoid traveling to China and urging those in the country to leave. Chinese officials have extended the Lunar New Year Holiday nationally until 2 February and until 9 February in certain provinces. Trading on China’s stock exchanges resumes this week. Widespread business closures and supply chain disruptions are expected to negatively impact global growth in the first quarter of the year, with a bounce back foreseen later in the year assuming the outbreak is contained. Data show the virus’s rate of change of newly reported cases decelerating in recent days, though once workplaces are reopened an uptick could be seen. 
  • The official manufacturing PMI fell slightly from 50.2 in December to 50.0 in January in line with the consensus estimate. This confirms that economic growth had stabilised at the turn of the year due to the signing of the ‘phase-I trade deal’ with the US and generally improved global demand, combined with domestic stimulus.
  • China’s financial markets were shut last week after authorities extended the Lunar New Year holiday as part of their administrative efforts to contain the spread of the Wuhan coronavirus. Trading is set to resume on Monday this week. Before markets were shut, Hong Kong’s Hang Seng Index was down 9.5% from the last peak on 20 January. Emerging markets stocks were weak overall, with the MSCI Emerging Markets Index losing 2.9% in the week to 29 January.
  • Markets will continue to focus on the developments around the coronavirus and Chinese (Caixin) PMI figures out on Monday will be watched closely for any negative impact. However, just as the official (NBS) PMI figures last week, the survey was likely conducted too early to see any economic impact of the virus yet.

    Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, Wells Fargo, Handelsbanken Capital Markets, M. Cassar Derjavets.