Daily Macro: Differing Sino-US Agendas Undermine Global Growth Outlook and more

In this briefing:

1. Differing Sino-US Agendas Undermine Global Growth Outlook
2. FLASH: UK Inflation Falling Fast over 2018 Yearend
3. The United States: 2019 Set Fair but Then?
4. Philippines: The Hanjin Scare
5. FLASH: Brexit Deal Defeated by 230

1. Differing Sino-US Agendas Undermine Global Growth Outlook

The fate of the global economy in 2019 will hinge on the willingness of China and the US to combat decelerating domestic growth via invoking appropriate policy support.

Given current fiscal backdrops, both China and the US have less capacity to ease policy to boost growth compared to the available monetary measures at their disposal.

Pressure is increasing on Beijing to aggressively cut taxes in March to stimulate growth, as well as structurally boosting consumption.

China’s consumers have become increasingly more discerning in their attitude towards foreign brands, partly due to the rise of credible local competitors.

The current economic and financial environment is somewhat reminiscent of 2016 when a deal between the Fed and China averted protracted economic and financial turbulence, but the current China-US nexus makes an accord in 2019 extremely unlikely.

China is unlikely to act again as buyer of last resort for the world economy courtesy of another credit binge, but policy will instead focus on stabilising growth at 6.0%-6.5%.

2. FLASH: UK Inflation Falling Fast over 2018 Yearend

• UK inflation disappointed consensus expectations for the RPI again in Dec-18 with its 0.5pp fall to 2.7% y-o-y (index at 285.6), while the CPI print was in line at 2.1%.
• Upside news in my CPI forecast was from food and airfares while the downside on the RPI was from the housing sector.

3. The United States: 2019 Set Fair but Then?

While Donald Trump amassed troops along the Mexican border in order to repel the migrant caravan from Honduras, it is really the caravan of policy problems lined up behind him that is more likely to disrupt his presidency. Fiscal promises relating to public-sector pensions, Medicaid and Medicare are set to grow exponentially over the coming years. And then there is the increase in nonfinancial corporate debt since 2010 which has been accumulated during a period of the most distorted capital-pricing in history. When the first wave of renewed economic problems hit all there will be to withstand them is, in the famous words of ex-Fed Chair Janet Yellen, “More of Plan A”. The next time around, and that time is coming soon, it is likely to prove to be a dud.

4. Philippines: The Hanjin Scare

• Knee-jerk market reaction to the disclosure last Friday (January 11, 2019) of Hanjin’s (Philippines) severe cash flow constraints including the local banks’ loan exposure, was understandable. However, the banks FCDU (foreign currency deposit unit) loan exposure of US$412mn (roughly Php21bn) to Hanjin was modest relative to the banking system’s FCDU (banks Hanjin loan exposure is about 1.1% of FCDU deposits), outstanding bank loans, capitalization ratios, etc. Officials of the big local banks have assured markets and investors of their financial ability to cover potential Hanjin loan losses. Banks consolidated NPL ratio is in the low, single-digit (1.8% in October 2018) that can easily absorb the FCDU hit.  

• Will the employment losses from Hanjin’s local subsidiary located in Subic bay, spawn regional demand-side risk particularly for Central Luzon—a key, emerging commercial/industrial hub in Luzon? Against recent regional GDP estimates (2016-17), we failed to detect any severe employment shock during the height of Hanjin’s job shedding. Down to 3,000 workers (peak of more than 30,000 in 2014-15), we have already been through the worst of the jobless impact of Hanjin’s business collapse. Central Luzon’s regional GDP grew by over 9% in real terms in 2017 and 2016 (vs national GDP growth of 6.9% in 2016 and 6.7% in 2017) despite the likelihood of Hanjin’s job losses. Central Luzon’s manufacturing output still managed to rise by 2-digit rates in 2016-17.On a per capita basis, Central Luzon’s per capita real GDP grew by close to 8% in 2016-17 despite perceived regional job market adjustments. Perhaps the fiscal stimulus programs including more infrastructure projects directed at the Central Luzon provinces allayed the worst of Hanjin’s macro shock.

• I believe the Hanjin event risk represents an opportunity to buy risk assets on any sustained adverse market reaction while safeguarding one’s liquidity position.

5. FLASH: Brexit Deal Defeated by 230

• The UK parliament rejected the Brexit deal by a historically substantial margin of 230 votes (432 vs 202). Presentation of a plan-B will probably occur on Monday.
• A vote of no confidence in the government will occur on 16 Jan. With eurosceptics and the DUP maintaining support, an early election should be avoided.
• Theresa May is signalling greater openness to opposition support, despite its unreliability, which the market has welcomed. A codicil that clearly clarifies the backstop’s non-permanence still looks like the most likely solution, in my view.