The outlook for GDP growth remains muted with the economy still hamstrung by continued Brexit uncertainty. In the third quarter of 2018, business investment contracted for the third consecutive quarter for the first time since 2009. Consumer confidence hit the lowest level since 2013. The Bank of England remains on hold for the time being, although futures markets expect rates to rise to 1.0% by the end of the year. A further 0.25% increase is anticipated by 2021. Unsecured loan growth continues to decline with consumer credit and credit card growth lower. In 2018, car sales fell at the fastest rate in ten years. On the other hand, the labour market remains tight and wages are rising in reflection of this. Adjusting for inflation, wages rose at the fastest growth in two years. Once the uncertainty surrounding Brexit is lifted, we believe the economy will benefit from a rise in confidence, although this may prove short lived.
Growth forecasts have been downgraded modestly for the eurozone. Spain and the Netherlands look set to produce the best returns. Some have questioned whether the European Central Bank
has acted prematurely in ending its €2.6tn Quantitative Easing programme as economic data has slowed. We believe it is a sensible move especially in light of the US Federal Reserve scaling back and reversing its own asset buying. In any case, interest rates are unlikely to rise significantly in the short term. Manufacturing survey data in France and Germany both dropped to multi-year lows and a recent fall in German industrial output is of particular concern. Political protests in France reflecting frustration in the government could yet have an impact on economic output. On the positive side, eurozone unemployment continues to fall, dropping below 8% for the first time since 2008 and private sector loan growth rose at 3.3%, the fastest growth rate since 2009.
In reflection of growth concerns, the Federal Reserve trimmed its forecast for interest rate hikes for 2019 and will now wait to see the economic data before implementing any further adjustments. It is waiting for further increases in inflation before raising rates. Although there is evidence that wages are increasing in a tight labour market, this has not yet been reflected in stronger inflation. Markets are now anticipating that we are already close to the interest rate peak in this cycle so any significant move upward would surprise investors who are positioned for lower interest rates. Arguably, a more important issue is the pace of the unwinding of Quantitative Easing (see pages 10-11 for more information) which has a direct impact on market liquidity. On balance economic data remains robust, although there has been a modest slowdown in the rate of durable goods orders and industrial production. Corporate earnings growth, which was boosted significantly by corporate tax cuts in 2018, is likely to moderate somewhat going forward.
Quarter on quarter GDP growth for Q3 was revised down to -0.6% as companies cut capital investment on the back of weaker global demand and uncertainty. This was the worst outcome in over four years. On an annual basis, growth was flat. However, there has been improving momentum in recent employment data, with wage growth rising comfortably in real terms after accounting for inflation. If sustained this could help to generate domestic inflation and encourage the Bank of Japan to wind down its Quantitative Easing programme. The challenge is daunting given that CPI inflation has dropped back to 0.3% on the back of falling oil prices. The economy also has to contend with the proposed increase in consumption tax which is set to increase in October from 8% to 10%. Previously this has impacted consumption, at least for the short term.
Chinese economic data continues to moderate with the country embroiled in a trade dispute with the US. Weaker readings of retail sales, capex and industrial production all point to further falls in GDP growth. Despite this, growth for 2019 is expected to be an impressive 6%. China has recently introduced a number of stimulus measures in a bid to revive growth. These are aimed at helping smaller businesses and improving domestic consumption. Korea reported a downturn in exports. The country is a leading exporter of computer chips, ships, cars and petroleum products and has an important place in the global supply chain. As a result, its exports tend to have a high correlation with global earnings. It is to be hoped that any resolution of the trade dispute between China and the US will see this downward trend reversed.
The fourth quarter saw some stability in emerging markets currencies after a challenging start to the year. Economic output in Brazil has been stable as unemployment continues to fall. The stock market has performed well on expectations that the new President, Jair Bolsonaro, can push through much needed economic reforms. India was one of the few countries to deliver positive returns in equity markets to investors in 2018. The economy is less influenced by global trends and continues to perform robustly due to rising domestic demand. Vietnam has been one of the beneficiaries from the ongoing trade dispute between the US and China. Manufacturers have looked to move production from China and Vietnam has been seen as an attractive alternative given relatively cheap wages and access to skilled labour.