#MacroMemo - RBC Global Asset Management


On our economic radar this week


Produced by RBC Global Asset Management's Chief Economist Eric Lascelles, the #MacroMemo covers what's on our economic radar for the week.

April 15 - April 19, 2019

More green shoots  |  Fiscal stimulus  |  Oil rebound  |  Cdn regional roundup


  • In case you missed our latest economic webcast when it came out two weeks ago, here it is again: "Yield curve sends warning"

Further green shoots:

  • Green shoots continue to appear in the global economy.
  • The consensus global GDP growth forecast for 2020 has edged higher for two consecutive months. This can’t truly be said to represent a new trend, as 2020 only started to be forecast three months ago. But it is certainly different than the negative trend evident in the 2018 and 2019 forecast revisions. For that matter, while the 2019 global forecast continues to edge lower, the downgrading is no longer quite so universal along geographic lines. A smattering of countries are enjoying slight forecast upgrades, whereas none were a few months ago.
  • China has reported several further data points that argue the economy is stabilizing after a long swoon. This is important given that China generates a brain-bending one-third of global growth. The latest cluster of Chinese PMIs all managed to increase, adding on the prior month when one of the four PMIs rose. The amount of new yuan loans also exceeded expectations for a second-straight month. We are dubious that the Chinese economy can accelerate from here, but its trajectory looks to be flattening out, at least.
  • After a bad February, when U.S. job creation was barely positive, the March data returned to normalcy with a +196K print. Other labour market metrics have remained healthy throughout.
  • The U.S. ISM Manufacturing Index managed a surprise rebound in March, increasing from 54.2 to 55.3. That said, the ISM Non-Manufacturing Index fell further than was expected. This reflected the fact that several economic metrics continue to point downward in contrast to the greatest-hits list of sunny results.
  • To the extent theory can explain it – which isn’t always the case – the economic logic behind this tentative economic stabilization can be broken down into three parts:
    1. Financial conditions have indisputably eased now that central banks have staged a retreat.
    2. Fiscal stimulus is coming in somewhat ahead of initial expectations for 2019, as discussed in the next section of this memo.
    3. A fair portion of the growth deceleration represented a retreat from an unsustainably fast clip. This meant that growth should slow somewhat, not that it needed to decline indefinitely.
  • All of this said, we continue to expect less growth on the aggregate for 2019 than in 2018, and a further slight deceleration into 2020. Do not forget that protectionism remains a drag, U.S. fiscal support is vanishing, and the prior growth rate was unnaturally fast. The business cycle is also late, pointing to risks that skew to the downside.

Fiscal stimulus:

  • We frequently refer to fading U.S. fiscal stimulus. By our math, the U.S. in 2019 has now lost the fiscal tailwind that blessed 2018, and is set to suffer a palpable headwind starting in 2020.
  • However, this isn’t the end of the story. The global fiscal impulse is also worth evaluating. It appears to be slightly positive for growth.
  • Most of the story is that several other countries are becoming more fiscally expansionary in 2019.
  • However, there is also a definitional issue to clear up regarding the U.S. Technically, the U.S. can also be said to be fiscally stimulative in 2019, as defined by a structural fiscal deficit that is higher in 2019 than 2018. But we don’t ultimately count it as stimulus because other government policies such as tariffs, the government shutdown and measures to restrict immigration combined to offset the financial boost, even if they don’t show up in the government’s budget.
  • As per the IMF’s new Spring 2019 forecast of structural fiscal balances, advanced economies on the aggregate will enjoy fiscal stimulus worth 0.3ppt of GDP in 2019, up from 0.2ppt in 2018. This argues for a 0.1ppt acceleration in the rate of developed-world GDP growth from 2018 to 2019. This has represented an upside risk to us for some time, since governments classically open the taps when confronted with slowing growth.
  • However, this fiscal boost then reverses in 2020. The fiscal impulse reverses to -0.1ppt, translating into a theoretical deceleration of around 0.4ppt of GDP growth from 2019 to 2020.
  • On a national basis, German growth suffered a 0.4ppt drag in 2018. It should enjoy a 0.6ppt boost in 2019, arguing for as much as a 1.0ppt acceleration in growth from one year to the next.
  • Italy experienced a 0.1ppt boost in 2018. This follows a 0.3ppt boost in 2019, arguing for a 0.2ppt acceleration. In contrast to most, the boost then becomes a big 1.0ppt in 2020, arguing for something like a 0.8ppt acceleration in growth from 2019 to 2020.
  • Canada enjoys a 0.2ppt fiscal boost in each of 2018, 2019 and 2020. This means more growth than otherwise, but no fiscally-driven acceleration from year to year.
  • On other hand, the U.K. and Japan are set to experience a fiscal drag over the next few years.
  • Outside of the advanced economy space, China is generating the biggest fiscal stimulus of the bunch. The IMF estimates a 1.2ppt boost to growth in 2019, with private-sector estimates more in the range of 2ppt. This is somewhat larger than in 2018, which managed a 0.9ppt boost. Thus, all else equal, Chinese growth should accelerate by between 0.3ppt and 1.1ppt. However, given a variety of other headwinds, we budget for a slight deceleration despite the fiscal effort.
  • In summary, the world enjoys a bit of fiscal support in 2019 and this should be acknowledged. However, 2020 promises to be somewhat less supportive unless fiscal policy deviates from current expectations.

Oil rebound:

  • It has not escaped our attention that WTI oil prices have bounced from a low of $42 per barrel at the close of last year to $63 today. This represents a 50% appreciation.
  • Why has this happened? It is a mix of supply and demand factors.
  • Some of the strength is due to more supportive demand conditions:
    1. Economic growth has recently firmed, translating in theory into more demand for products like oil. Actual oil demand has risen notably in India and somewhat in China.
    2. The recent dovish turn by central banks translates into easier money. That, in turn, means better growth (hinting of more oil demand), additional inflation (prices go up faster, including for oil) and a less challenging comparison from an investment perspective to bonds (oil doesn’t pay a coupon, so the superiority of a coupon-paying bond shrinks when rates decline).
    3. Late cycle has classically been a fairly good time for commodity prices, though this is predicated on the idea that economic growth is unusually robust as the cycle matures. This has not been the story over the past year.
  • Much of the strength in crude prices is due to restrictions in the supply of oil:
    1. OPEC has enacted significant supply cuts. These were motivated in large part by a desire to halt the decline in oil prices that plagued the market last fall, though conceivably also to ensure Saudi Aramco’s public offering receives a good price. Venezuela’s economic dysfunction has limited production there, while Iranian sanctions – while broadly feebler than first envisioned – are restricting supply somewhat.
    2. Alberta’s mandated oil production cut of more than 300K barrels has also helped to balance the global market, though the restrictions are now being lightened.
    3. Shale oil producers in the U.S. are demonstrating a bit more discipline in their production and expansion plans.
  • Several implications extend from higher oil prices.
    • First, inflation is set to run slightly hotter in the coming months. This was already evident in the latest round of inflation figures. A bit more is still to come as the latest oil machinations are factored in, alongside upward wage pressures. However, inflation is unlikely to become a problem any time soon.
    • Naturally, higher oil prices are good for oil-exporting countries, and bad for oil-importing countries. Note that the U.S. has seemingly made the leap from the second category to the first one. Although it is not strictly a net oil exporter, it is becoming a net energy exporter. For that matter, the remarkable price elasticity of supply of shale oil producers is such that the U.S. economy appears to be helped slightly by rising oil prices and hurt by lower oil.
    • The effect on inflation and growth should be fairly tame. The reason has much to do with a broader perspective of what constitutes a normal oil price. Six months ago, oil prices were higher than today, at $76 per barrel. Oil prices are not so much high today as they are no longer temporarily low.
  • Framed in a broader context, oil prices were as low as $26 in early 2016. At the other extreme, they landed above $100 less than five years ago. Given the lags involved in mapping swinging oil prices onto the macro story, perhaps the most useful message is that oil prices are looking pretty normal, smack dab in the middle of the (modern) historical range.
  • With regard to the price outlook from here, we have no great disagreement with current oil prices. Over the medium term, fair value is likely lower, perhaps as little as the $50 per barrel that U.S. oil producers claim is necessary to motivate additional supply. Over the long run, renewables could exert downward pressure on this.

Brexit delays:

  • The Brexit deadline has been delayed yet again, now until October 31.
  • This increases our conviction that a) no one wants an accidental (hard) Brexit; and b) a fairly soft Brexit is increasingly likely, most probably a customs union.

A quick Canadian roundup…

Ontario budget:

  • Ontario’s budget was the frugal document that had been widely expected. Courtesy of RBC Economics’ calculations, 20 of 25 major expenditure areas will suffer spending cuts over the next year. Overall program spending will rise by just 1.2% per year over the next four years. On an inflation-adjusted per-capita basis, spending is projected to fall by 1.6% per year.
  • This restraint will translate into the theoretical elimination of the province’s long-standing budget deficit in fiscal year 2023-2024.
  • Bucking the trend, additional funding was secured for health care, upgrading educational premises, a major subway line, and a new childcare tax credit.
  • Disappointing some, there were no additional business-friendly measures or tax cuts beyond the accelerated depreciation announced last fall.

New carbon tax:

  • On April 1st the four provinces that had declined to implement their own carbon tax regimes were subjected to a federal equivalent.
  • Gas prices in Saskatchewan, Manitoba, Ontario and New Brunswick are now 4.4 cents higher per litre. The tax is not a cash grab in the sense that 90% of the money is returned to the households of each respective province.
  • However, the change obviously has distributional consequences, hurting those that use the most carbon-based fuels and rewarding others.
  • Higher gas prices are inflationary, but not by a lot. Gasoline for transportation represents 3.3% of the consumer basket. The price per litre has increased by around 3%. Given that the change affects around half of the country, it adds up to a mere 0.05% increase (albeit permanent) to consumer prices.

April 1 - April 5, 2019

Green shoots?  |  Chinese stimulus  |  Brexit update  |  Data run

March 25 - March 29, 2019

GIO  |  Dovish Fed  |  Inverted curve  |  Mueller  |  Cdn budget  |  Cdn electione  |  Brexit

March 18 - March 22, 2019

Webcast  |  Fed  |  Brexit  |  Cdn budget  |  Tariffs  |  Climate change

March 7 - March 15, 2019

China in four acts  |  Positive data  |  BoC  |  ECB  |  Cdn GDP

February 25 - March 1, 2019

Fed balance sheet  |  US-China  |  Auto tariffs  |  more

February 11 - February 15, 2019

Business cycle  |  Event risks  |  U.S. politics

February 4 - February 8, 2019

Good news  |  European weakness  |  Money supply  |  Deregulation  |  Webcast + Podcast

January 28 - February 1, 2019

Shutdown  |  Boomerang effect  |  Data stew  |  Central banks  |  Cdn insolvencies

January 21 - January 25, 2019

Stall speed  |  Brexit  |  Shutdown  |  China

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