Value Investment Partners Economic Report

July 2019

The month of July gave insight as to how exactly the trade war is affecting the United States and China. Q2 of 2019 saw the Chinese government report the Chinese economy growing at its slowest pace since 1992 when it started publishing numbers, with its real GDP at 6.2% compared to a growth of 6.4% in Q1 and 6.6% for 2018. This derived from a decline in China’s exports for June as a result of a sharp reduction in exporting to the US. While this was consistent with the government’s growth target of 6-6.5% this year, the fall in growth is obviously directly related to the trade tensions between the two superpowers.

Temptation to stimulate the Chinese economy are no doubt existent among the leaders of the country, but the fact remains a reduction of interest rates from the central bank would depreciate the renminbi. Although this would enhance their competitiveness in the export market, this could only incense the already tender relationship between the US and China given that the US believe the renminbi is unnecessarily weak to begin with.  

Conversely, the US Federal Reserve cut its benchmark policy rate by 25 basis points to the range of 2-2.25% at the closing of July. The Fed referenced economic weakness as well as lacklustre inflation as the trigger for easing monetary policy by cutting interest rates, despite there being a robust job market which has the potential to wage growth. Furthermore, the inversion of the yield curve (in which the 3-month Treasury Bills’ yield exceeds that of the 10-year government bonds) is cause for concern given that every recession in the modern era has been preceded by the yield curve inversing. Similar to China, international exports were a large detractor for economic growth for the US in Q2, with the export of US goods and services falling at a rate of 5.2% for Q2.

Europe continues to be a basket case for investors as its economic conditions decline through 2019. Manufacturing – despite the potential of a shift to Europe in the midst of the trade war – has performed poorly in the eurozone and particularly Germany, which is concerning considering Germany’s mainstay on the globe is car manufacturing. The Purchasing Managers’ Indices for manufacturing in the eurozone fell from 47.6 in June to 46.4 in July, a 79-month low – with the PMI an indicator for the sentiment and activity within the sector, it is hard to put a positive spin in this space.

July also saw Boris Johnson appointed as the Prime Minister of the United Kingdom after the resignation of Theresa May. As a staunch supporter of a Brexit with or without a deal with the European Union, the market has priced in a no-deal scenario more than ever and the Bank of England Governor Mark Carney has stated that easing monetary policy in such a situation is a very real possibility.

Domestically, the Reserve Bank of Australia cut rates for the second consecutive month in July, the first time a consecutive cut occurring since June 2012. Previously 1.5%, the rate was reduced by 0.25% in June and again by the same amount in July as an attempt by the RBA to increase consumer spending in the Australian economy. Given that it could take at least a quarter to realize the full effects of a rate cut, the effectiveness of the actions are still yet to be seen wholly. That said, the housing market downturn has begun to slow and looks to reverse in the second half of 2019, largely as a result of cheaper credit due to the rate cut. Furthermore, tax cuts legislated by the reinstated Liberal Government will give over $1000 to approximately five million members of the Australian public through tax refunds. Combined, the tax refund and lower rates will ideally equal higher disposable income of Australian households, which hopefully leads to increased consumer spending.

Source: Deloitte, Reuters, The Washington Post