February Macro Dashboard
Global growth will be weighed down in Q1 by the COVID-19 outbreak. While China will likely be the most affected, Germany, Japan, and other key markets like South Korea will also feel the pain. The U.S. will likely be relatively more cushioned, but supply chain disruptions and reduced foreign demand will weigh on U.S. businesses that are reliant on China. The extent of the drag is still unknown, as it is not yet clear if contagion rates are slowing. If the virus is contained, markets are pricing in a “V-shaped” recovery; otherwise it could be a much slower “U- shaped” recovery. The COVID-19 contagion rates and subsequent impacts, U.K. trade negotiations, and the Boeing production halt pose downside risks to the outlook, while COVID-19 policy responses, sustained strength in U.S. housing market, and the U.K. post-election rebound are upside risks.
U.S. GDP growth is likely to temper somewhat in Q1. Consumers and residential investment will be a boon to the headline, but uncertainties surrounding COVID-19 and the presidential elections will keep business investment weak. The labor market is in good health despite a drop in job openings. Trend job growth is strong, labor force participation rates are reaching cyclical highs, and initial claims are low. Inflation is inching higher in January, but the Fed will likely maintain an easing bias. While markets are pricing in at least one rate cut in 2020, the Fed has not signaled the same. If economic data comes in weak, the Fed may cut rates, but if they do not, the markets may be set up for disappointment.
GDP growth across the Eurozone and U.K. slowed in 4Q19, but is set to stabilize in 1Q20. The U.K. is seeing a post-Brexit rebound, Spain is bouncing back strongly, and labor markets across the region are in good shape. Private consumption is set to drive growth in Q1. However, impacts from the COVID-19 outbreak are weighing on the outlook, particularly to Germany’s export-dependent economy. Inflation is ticking up across the region, but central banks will likely remain on hold in the near-term.
Risks are tilted to the downside in China and Japan. The outbreak of COVID-19 will measurably weigh on both economies in the first half of 2020. China has already implemented accommodative monetary policy to cushion the blow as productive capacity remains constrained, and the government signaled fiscal stimulus is on the way. Japan’s 4Q19 GDP growth contracted more than expected, and now risks are weighing on 1Q20 growth. Initially equity markets seemed to be looking through the impact of the virus as they saw a bounce back following the outbreak being contained, but it is still too early to tell if this will be the case.