Macroeconomic Review – May 2019

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May 2019 Macroeconomic Review

Global Economy

o The pace of global growth is slowing amid uncertainty regarding trade tensions, Brexit uncertainty and geopolitical risks. The IMF downgraded global growth in 2019 for the second time this year from 3.5% to 3.3%

o However, the accommodative financial conditions, courtesy of the central banks’ reaction to the financial turmoil late last year and the decisive actions of policy makers in China, might cushion the downturn

o The US Shale Revolution is changing the international oil and gas industry and has profound geopolitical and economic implications. The Trump administration’s willingness to impose sanctions on Iran and Venezuela and the reduction in the US trade deficit are a living proof to this revolution

o The dovish stance of central banks all over the world continues to support all risk assets except emerging markets’ currencies. A strong US dollar, worries about growth, weak levels of foreign investments and current account flows are the main reasons responsible for creating this divergence

o As opposed to investors’ expectation for the US dollar devaluation amid the Fed’s abandoning plans for further interest-rate hikes this year, the dollar index continued to appreciate. Strong US economic indicators and current account deficit contraction are the main reasons

United States

o The US economy endures the global slowdown relatively well as Q1 GDP expanded at a 3.2% annualized rate, above market expectations. Increase in inventory and a boost from trade were the main engines that offset a slowdown in consumer spending and business investment

o However, recent reports and leading economic indicators show mixed signs as retail sales rebound, consumer sentiment improves, job reports are positive but the housing market is still struggling back and ISM’s and PMI’s indexes moderated more than expected

o Labor market shows solid numbers relieving concerns about a cooling economy. Payrolls rose by 263K and unemployment decreased to 3.6%, close to all time lows. Average annual wage gains stabilized at 3.2%, suggesting labor market can improve further without creating wage pressures and consequently inflation

o The key measures of US inflation rose less than the forecast, leaving the Fed with more room to maneuver in the coming months as the local economy produces good results but not too good to create price pressures

o American oil export increased last year to more than 2M barrels a day and it is expected to jump to 5M by late 2020. The US will become the world’s second-largest exporter of crude and refined products by 2024. This revolution will undoubtedly increase further its geopolitical and economic strength and influence


o Slowing global momentum and concerns over Brexit and trade disputes take a heavy toll on the Eurozone economy. Despite the flattening out of some economic indicators, it seems like the economy lacks the power to realize its potential and is expected to expand only by 1% in 2019

o The manufacturing sector continues to be the weakest link as leading indicators, such as the PMI, plummeted in March after factory orders plunged during February and industrial sentiment lost more ground

o The German economy exhibits lackluster performance that places it with Italy as Europe’s underperformers. The German government downgraded its growth forecast for 2019 to 0.5%, the lowest level in six years

o After a gradual improvement in consumer sentiment during the last few months, April’s numbers showed some loss of ground. However, the strong labor market and accommodative financial conditions are expected to support the local demand and offset some of the deterioration of external demand

o Euro area annual core inflation climbed by 0.4% to 1.2%, above market expectation. The rebound in inflation was attributed to the Easter holiday and the jump will most probably prove temporary

o The ECB decided to keep interest rates unchanged and expects them to remain at current levels at least through the end of 2019, as slower growth momentum extended into 2019 and may extend further to the end of the year due to global headwinds, geopolitical factors, protectionism and EM vulnerabilities

o The Brexit saga continues as the EU approved a delay until October. Negotiations for a new Brexit deal that will get the UK out of the EU are conducted ponderously as uncertainty takes a heavy toll on both sides


o A relatively strong growth is expected in Q1 due to an increase in automobile sales amid changes in the green tax reform. However, the local economy is expected to weaken in 2019 amid global economic slowdown as the BOI slashed its growth forecast for 2019 by 0.2% to 3.2% and IMF cuts growth forecast to 3.3%.

o Uncertainty regarding the ability of the new government to make fiscal adjustments as government deficit increased already to 3.4% from GDP, above the 2.9% fiscal target

o Despite a decline in unemployment rate to 3.9%, there are signs of weakness in the labor market as the percentage of open jobs decreased in Q1 to 3.52% the lowest level since 2015

o Headline inflation increased by 0.5% in March and YOY inflation edged up to 1.4% and continued to stabilize above the lower end of the inflation target (1%-3%). Although prices accelerated in the last few months, they are expected to stay at current levels in the months ahead due to base affects and the Shekel’s strength

o After consolidating during February and March, the Shekel appreciated during April against most currencies, forcing the BOI to signal that the option of intervention in the currency market is still on the table

o In respond to the strong Shekel, the BOI governor, Amir Yaron, said that “the maneuvering room for increasing the interest rate in Israel, without narrowing the interest rate gap that opened in recent years, will decrease to some extent”