Macroeconomic update: Recession fears in Europe escalate

11:31 am 23 September 2019

  • PMIs in Europe tumble, spark recession fears
  • US housing market shows strength
  • India slashes corporate tax rate

Europe – recession more and more likely

A slight improvement in the PMI surveys in August raised recovery hopes among investors counting on a combination of fresh money printing from the ECB and improving economic prospects. These hopes have just been dashed as flash European PMIs for September are outright awful. Both indices in manufacturing and services deteriorated in Germany and France and the most important of them all – German manufacturing, tumbled to a scary 41.4 points. That is a recession-like level and after months of hovering around 43-44 points it’s crystal clear that this is not a coincidence but a steady deterioration. With the monetary policy easing already “consumed” by the markets investors may now wake up to the idea that it doesn’t happen without a reason.   

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It’s not a secret that German manufacturing has Europe-wide impact. This red line doesn’t promise much good for the European markets. Source: Macrobond, XTB Research

Key economic event this week: German Ifo index (Tuesday, 9am BST)

US – housing starts soar, is that a good omen?

The US economy has been offering conflicting signals as of late. Global manufacturing slowdown seems to be inflicting more pain on the US industry but the consumer part of the economy remains buoyant. One example of this was a massive housing starts beat for August – 1364k annualized compared to expectations of much more muted 1250k. Seems like plummeting mortgage rates are having an effect here. It’s a reason for cautious optimism – at least historically the cycle peak (which we’ve just witnessed) was never seen just before the recession started. However, this is just one of many indicators. Investors should pay attention to the extent that global manufacturing slowdown hits the US and how that affects the US consumer that has been quite resilient so far.

Housing starts peaked at a different point of previous expansions but never just ahead of recession. SLFed

Key economic event this week: PCE inflation (Friday, 1:30pm BST)

Asia – India cuts corporate tax rate, exports in South Korea craters

Last week started with a series of disappointing data from China (especially industrial output growth falling to 17y low of 4.4%) but the key news from Asia seems to be Friday’s surprising action from the government in India that announced a cut in corporate tax rate from 30 to 22% (effective rate) and even lower for new business. What is more, the central bank will remit over $20 billion to the government so it’s like a combination of fiscal and monetary stimulus. The impact will be just over $20 billion annually – it might not seem like much from the global perspective but it’s another effort to boost ailing global economy. The boost is much needed as showed by Korean exports that dropped by over 20% y/y in September (!). This shows the economic slowdown is alive not only in Europe but also in Asia.

Korean stock market (here KOSP200) has rebounded strongly but exports data for September has been very weak. Source: Macrobond, XTB Research

Key economic event this week: RBNZ decision (Wednesday, 2am BST)

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