The global growth outlook is little changed as U.S. economic risks skew to the downside and Europe grapples with waning voter support for center-left socialist parties.
The global Nowcast is drifting sideways. If one were disposed to optimism, one could say that perhaps we are moving from a phase of stabilization in growth to a phase of slightly faster growth. But we think the global economy is still bouncing around the current growth pace. Globally integrated manufacturing is not doing very well, but more domestically oriented services are doing better.
U.S. economy remains vulnerable
In the United States, overall growth has not changed much. Activity in the services sector rose slightly in December, but manufacturing activity shrank for a fifth month. Auto sales are flat, and corporate investment remains weak. The labor market report was a little disappointing, with December’s payroll and wage growth missing expectations. Nonfarm payrolls increased by 145,000 while the unemployment rate held steady at 3.5%. Average hourly earnings rose by just 2.9%.
The weakness in wages is a bit puzzling. The contribution of trade — one of the largest sectors of the labor market — to overall wage growth declined in November and December 2019. And another big sector — education and health — showed a similar, if much less pronounced, development. This may be an oddity that reverses in the near future, or it may be a sign that we are approaching a turn in the labor market. Wage growth hasn’t been fast enough to put pressure on corporate profit margins. This signals a low-investment, low-productivity growth recovery. The data confirms steady, slow growth over the short term and highlights vulnerabilities in the economy. To put it another way, the risks are to the downside.
Eurozone politics remain center stage
The eurozone’s Nowcast is improving, but the growth rate is what it was over the summer. The region’s economies are growing at about a 1% annualized pace. Manufacturing activity remains weak, but the services sector is doing better. Slow growth continues to exert pressure on the region’s politics.
Spain has a government after two national elections in 2019 that revealed a deeply divided electorate. A coalition government — the first in the country’s recent democratic history — will involve Prime Minister Pedro Sánchez’s Socialist Party (PSOE) and the far-left Unidas Podemos and Catalan separatist party, Esquerra Republicana de Catalunya (Catalan Republican Left). It is not clear how long this coalition will survive.
Sanchez’s policy program includes repealing the 2012 labor market reform and raising taxes on companies and higher-income Spaniards. He also plans a higher minimum wage and changes to pension reforms. The administration doesn’t have a majority in parliament and will have to cut ad hoc deals with various regional parties to pass legislation. So, it’s possible that not all the proposals will become law. But the economic agenda amounts to a considerable change in direction. We will monitor how the economy performs under this set of reforms.
This type of coalition, of the center-left and the hard left, has been in place in Portugal for a while and comes against the backdrop of conventional center-left socialist parties doing very badly in most of Europe. The United Kingdom was the latest to join this trend, with the remarkably weak performance of the Labour Party in the December election. In Germany, regional governments have this type of center-left and hard-left coalition. The appetite for new approaches is also on display in Austria, where the Greens have joined a coalition with the conservative People’s Party. Although macro policy will not change much, the new government will implement a reasonably ambitious green agenda.
Elections and Brexit
The U.K.’s electoral system produced a clear, pro-leave Brexit result. Britain will officially leave the EU at the end of January and begin an 11-month transition. During this time, the government hopes to negotiate a comprehensive deal on the terms of its future relationship with its European neighbors. In our view, this isn’t going to happen; the only deal that could be inked by the end of 2020 is a very limited one. So, Boris Johnson’s government will jump up and down and scream and shout and extend the transition period.
It is important to note these talks will ultimately determine the extent of economic damage Brexit does to the United Kingdom. A close relationship would minimize the damage; indeed, it could make it barely detectable. A distant one would cause substantial short-term disruption and be a drag on growth for many years. The business community has now begun lobbying in earnest for a close relationship. But the economic policy record of the Conservatives is poor, especially on macro issues, and it’s hard to be confident that good sense will prevail.