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Economic Research
Global Data Watch
January 4, 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
favorably described the dovish pivot the Fed took in early
2016, when worries about China were rising and risk markets
were tense. We think Powell’s dovish message was unmistak-
able, and we now look for only two hikes this year(July and
December). The turn toward global fiscal easing is also im-
portant and is unusual at this stage in the expansion. We be-
lieve more fiscal support is set to be announced in China. Ja-
pan’s government recently delivered a FY2019 budgetthat
includes policy offsets to neutralize (temporarily) the impact
of the October VAT hike.
As was the case in 2014-15, a global disinflationary tilt is
likely to generate an income rotation away from goods pro-
ducers as the brunt of the shift is felt, at least initially, in the
commodities and manufacturing sectors. At that time, profits
and capex weakened but there was no overall retrenchment in
labor markets (Figure 2). If we are right, the backdrop of two
years of double-digit profit gains and continued access to
bank credit will promote a similar dynamic. As such, sus-
tained job growth, rising DM wage gains, and policy easing
should prevent more damaging negative feedback loops from
taking hold.
Chinese officials respond to downside risk
As our forecasts adjust to a shifting landscape, geopolitics and
policy uncertainty remain a key wild card. In addition to US-
China trade and Brexit we now need to recognize the risks
associated with the US government shutdown. A near-term
resolution to this conflict would likely have little impact on
current-quarter growth but a prolonged shutdown could be a
significant factor, particularly if it raises broader concerns
about a dysfunctional US political environment.
The biggest geopolitical threat remains the US-Chinatrade
conflict. Sluggish China exports and sliding business confi-
dence may reflect its toll on growth. Indeed, the recent evi-
dence hints at further slowing from the 6% annualized GDP
growth we estimate for 4Q18. The manufacturing PMIs were
soft in December, especially their forward-looking orders and
expectations components. At the same time, industrial profit
growth resumed falling in year-ago terms.
In response to these developments, Chinese policymakers
have continued to take steps to support economic growth.
China achieved a temporary truce with the US by agreeing to
hold comprehensive talks on trade, with a US delegation due
in Beijing next week. Also, officials have eased policy on
multiple fronts. The PBOC took another step in this direction
overnight, announcing a further 100bp cut in the RRR this
month, somewhat earlier than we expected. This followed
recent PBOC actions to increase the supply of credit to small
and medium-sized businesses. On the fiscal side, the NPC
recently authorized the State Council to allocate the quota for
local government debt to support the recent pickup in infra-
structure spending. We also expect a VAT cut to be an-
nounced soon. The full set of December activity data due over
the next two weeks will provide a clearer picture of the econ-
omy’s momentum heading into 2019.
New Year brings no cheer to EMAX exports
In EM Asia ex. China (EMAX), exports look to have softened
through year-end, with the risk that weakness spills over into
early 2019. December trade reports from Korea and Vietnam
point to a pronounced slowdown in global exports of high
technology as well as overall shipments to China (Figure 3).
The correction in Korea’s tech sector now appears deeper than
we had expected, following a mini-cycle upturn that had per-
sisted until 3Q. Manufacturing PMI and export orders reports
from Taiwan sent a similarly downbeat message. Taiwan’s
PMI fell 0.7pt in December to 47.7, its lowest reading since a
short recessionary period in late 2015, and the export orders
component fell to just 44.6. Against this overall sluggish
backdrop, regional supply-chain shuffles may be influencing
trade flows as manufacturers seek to avoid higher US tariffs
on China. In general, trade data highlight pronounced weak-
ness in EMAX exports to China compared with elsewhere.
Near-term downside risk to Japan
Although a large rebound in Japan GDP growth to 3% annual-
ized last quarter looks to have materialized, the latest survey
data raise concerns about momentum at the turn of the year.
Along with manufacturers projecting a drop in December out-
put, this week’s PMI report of a sharp deceleration in new
orders points to continued weakness in the current quarter
(Figure 4). The latest trade report of slowing exports, espe-
cially to China and the EU, echoes the soft tone of the year-
end data. At the same time, the market sell-off and recent
jump in the yen add to the downside risk to our call for GDP
to decelerate this quarter but remain solid at 1.5% annualized.
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%3m/3m, saar
Figure 3: Korea customs exports by destination
Source: MoTIE, KITA, and J.P. Morgan
China
ASEAN
USEconomic Research
Global Data Watch
January 4, 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
In the face of near-term growth worries, policymakersare
focused on offsetting the negative impact from the consump-
tion tax hike scheduled for October. On December 21 the
Cabinet approved the FY2019 budget, introducing a set of
policies that would offset the near-term burden of the tax hike
on households (including a reduction in the tax on food and
initiatives for free education and childcare).
The calm before the Brexit storm
After a couple of quiet weeks, the Brexit storm is about to
resume. The debate in Parliament on Prime Minister May’s
withdrawal agreement is set to resume this Wednesday with
the vote on the deal scheduled the following week. We con-
tinue to expect the motion approving the withdrawal agree-
ment to fail by a three-figure margin. Our best guess is that
after losing the vote, PM May willstay calm and carry on.
She will not resign nor will she lose a vote of no confidence
submitted by the Labor opposition. PM May will look to the
EU for some help and put the deal before Parliament again.
Our central expectation is that she will secure a Parliamentary
majority at a second or possibly even a third attempt.
High inflation to keep CBRT on hold
Turkish inflation delivered a downside surprise in December
falling to 20.3%oya. Most likely this slide reflects the positive
impact of the CBRT’s prudent policy stance, weaker domestic
demand, and government-introduced tax cuts. While signs
that inflation is slowing are welcome, the pace is likely to
remain close to its current level in the coming months. Alt-
hough weak demand and administrative price cuts will put
further downward pressure on inflation, a 25% minimum
wage hike is likely to provide an offset. Thus barring political
pressure in the run-up to the March local elections, we expect
the CBRT remain on hold until June when we expect a 100bp
ease. A more favorable external environment could create
leeway for the CBRT to pull forward the first cut by a month
or two.
Latam administrations setting a better tone
New presidents in Brazil and Mexico are under the micro-
scope and their initial actions have sent a positive signal