Another uncertain quarter has come to an end, and (as ever) it’s still Brexit that dominates the economic headlines.
By the time we send our next update the UK could have left the European Union, although, until then, the economy remains volatile. If some indicators are to be believed, we’re even heading for a recession.
Here’s your Q3 2019 investment update; a review of the major economic stories of the past three months and the latest market data.
UK
Politics and Brexit continued to lead the headlines in almost every news bulletin this quarter. As expected, Boris Johnson won the race to be the leader of the Conservative Party and Prime Minister in July, immediately committing to leaving the EU on 31st October ‘do or die’.
It’s been an eventful few weeks for the new PM. As well as an unprecedented run of defeats in the Commons, he has been plagued by allegations about his professional affairs and private life and suffered the indignity of having his prorogation of parliament ruled unlawful by the Supreme Court.
Meanwhile, the UK continues to hurtle towards a potentially damaging ‘no deal’ Brexit on 31st October, and this uncertainty means that the UK could be heading into recession.
With little sign of a political breakthrough, factory output declined, and construction activity slumped in September, according to the latest data from IHS Markit and the Chartered Institute of Procurement and Supply (CIPS).
The IHS Markit/CIPS Purchasing Managers’ index (PMI) fell from 50.3 in July to 49.7 last month, on a scale where anything above 50.0 indicates economic growth. Some analysts believe that Britain looks likely to remain in contraction in the third quarter of 2019, marking the second consecutive three-month period of decline in GDP: the technical definition of recession.
This downbeat view has been shared by the Bank of England who, earlier this summer, cut economic growth forecasts to 1.3% for 2019 and 2020, down from 1.5% and 1.6% respectively.
Bad news from the High Street continued to appear as retailers announce further closures and redundancies. The biggest casualty was package holiday provider Thomas Cook, whose collapse in September led to 9,000 job losses and left 150,000 travellers stranded around the world.
Europe
According to a ZEW Institutes survey, German investor confidence has hit an eight-year low, with the economy shrinking by 0.1% in the second quarter. Italy’s economy also flatlined while there were modest increases in Spain (0.5%) and France (0.3%).
As a whole, the Eurozone grew at 0.2% in the second quarter, slowing from a 0.4% expansion in Q1.
The IHS Markit Germany Manufacturing PMI fell to 41.4 in September 2019 from 43.5 in the previous month. This highlights the steepest contraction in factory activity since the global financial crisis in mid-2009, as output declined at the sharpest pace since July 2012. New business activities declined more rapidly than at any time in the past decade given weaker overseas demand.
September saw the European Central Bank cut rates on deposits for the first time since 2016, setting a new record low at -0.5%. The move was part of a broader stimulus package as Europe’s economy slows down and the package also includes a revival of the €20 billion quantitative easing programme.
Many analysts are concerned that the eurozone could be close to recession while Germany’s central bank, Bundesbank, has also warned of recession risk, citing Brexit and weak business investment as reasons.
US
Back in July, the Federal Open Market Committee (FOMC) announced that it was cutting its benchmark overnight lending rate for the first time in 11 years. Then, two months later, the Fed cut interest rates again, to a target range of 1.75% to 2%.
According to the Fed’s ‘dot plot’ of individual expectations, five members thought the FOMC should have held its previous range of 2% to 2.25%, five approved of the 0.25% cut but keeping rates there through the rest of the year, and seven favoured at least one more cut this year.
Stock markets rewarded the move with a rally that took the Dow Jones Industrial Average from a two-month low of 25,479 on 14 August back up to a near-record 27,219 on 13 September.
Despite the cut in interest rates, consumer spending slowed which signalled the US economy cooled in the third quarter. Personal consumption expenditures, which accounts for the bulk of US gross domestic output, climbed just 0.1% month on month — its weakest showing in six months.
This fell short of economists’ expectations for a 0.3% increase and cooled sharply from the downwardly revised 0.5% increase recorded in July.
Consumer spending has been the main engine of economic growth. However, the latest data suggests that the longest period of US expansion since 1854 continues to lose momentum in the penultimate quarter of the year as Americans tightened their purse strings.
Rest of the World
In a new report, the UN’s trade and development body, UNCTAD, said that 2019 will endure the weakest global expansion in a decade and there was a risk of the slowdown turning into outright contraction next year.
Global growth will fall from 3% in 2018 to 2.3% this year – its weakest since the 1.7% contraction in 2009, according to the report. Several big emerging countries were already in recession and some advanced economies, including Germany and the UK, were dangerously close to one.
Trade tensions between the US and China, and political tensions in the Middle East, are also contributing to a global slowdown.
Manufacturing activity, as measured by PMI data, has dipped into contractionary territory in many regions, most notably China, Germany, the Eurozone, Taiwan and Korea. Services PMI, which has held up better than manufacturing, is also beginning to deteriorate.
Global central banks have shifted towards easing monetary policy, designed to support the global economy throughout the rest of 2019 and into 2020.
Get in touch
If you need advice on any aspect of our Q3 2019 investment update, please get in touch. To find out what we can do for you, email admin@stonegatewealth.co.uk or call us on 01785 876222.
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