Chief economist update: Another year over, a new one begins

Happy New Year!

I wish you one, although undoubtedly you've all been wished the same thing many times over from the lead up to Christmas and some are still coming in seven days into 2019 ... better late than never.

You, I and Irene certainly need well-wishes a-plenty if 2019 turns out to be anything like 2018 - where all major world equity markets produced negative returns and are at correction levels (China's Shanghai composite index is in a bear market) and global economic growth momentum peaked in February 2018 and has since then, slowed sharply.

The volatility of 2018 has spilled over into this side of the New Year as equity markets rise on good news and fall on negative headlines ... day in and day out.

The chart of the JP Morgan Global PMI picture above is instructive in that a great portion of the slowdown in global growth is due to the significant downtrend in the manufacturing sector - one that's pulling down activity in the services industry.

We all know the why's and wherefores of this and its name is "Tariff  Trump". US President Donald Trump's declaration of the 25/10 tariff on steel/aluminium on 1 March 2018 set the wheels of global economic activity and trade into reverse and with them, equity market fortunes.

China, being Trump's central target, is worse hit as its economy and its stockmarket declined. So much so, the People's Bank of China (PBOC) recently announced a 1% cut in the reserve requirement ratio (RRR) - 0.5% on January 15 and 0.5% on January 25 - and estimates to release around 800 billion yuan (US$117 billion) of liquidity, as well as, boosting counter-cyclical policies such as tax cuts, fee reductions and further decreases in the RRR.

Seen in this light, Trump has already won the war against China. More so, because despite the slowdown in global trade and the Fed's four interest rate hikes in 2018 (the fed funds rate increased from 1.5% to 2.5%), US economic growth remains strong - evidenced by the sharply stronger-than-expected jump in non-farm payrolls (up 312,000 in December versus consensus predictions for a 180,000 gain).

While this appears to be an aberration, the fact remains the US labour market remains solid (and this, despite the recent government shutdown). Still, America's economy can't continue to grow while its neighbours languish. Sooner or later, it'll come back to bite Uncle Sam on his behind.

None other than Fed chairman Jerome Powell understands this. In a joint interview with his predecessors - Ben Bernanke and Janet Yellen - at the American Economic Association's annual meeting in Atlanta on 4 January 2019, Powell declared: "With the muted inflation readings that we've seen, we will be patient as we watch to see how the economy evolves" and that, "We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track ... there is no pre-set path for policy."

This is half the good news. The other half is Trump declaring an end to the trade war, re-igniting global activity and ensuring that 2019 would indeed be a happy one.

Read more: FedNew YearAmerican Economic AssociationBank of ChinaBen BernankeChristmasJanet YellenJerome PowellJP Morgan Global PMIDonald Trump
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