Tags: economic | growth | consumer | trust

Economic Growth to Struggle as Consumer Trust May Be Slow to Mend

Economic Growth to Struggle as Consumer Trust May Be Slow to Mend

By    |   Monday, 04 November 2019 09:41 AM

U.S. Commerce Secretary Wilbur Ross has been talking trade over the weekend.

There was some upbeat commentary on the prospects of a trade deal with China, which is now standard for any U.S. official talking on the prospects of a trade deal with China. It is the Chinese who have been sounding more cautious about the longer-term outlook although still looking to do a phase-1 deal in the near term.

Ross also offered a new set of comments to the effect that the U.S. may not need to tax U.S. consumers of autos partially made in the European Union, Reuters explained. The European auto tariff/tax topic has been rather overlooked lately. There have also not been too many tweets on the subject of late.

President Donald Trump was sounding upbeat on the prospects for a phase-1 China deal, but didn’t focus on the European Union issues.

One of the big consequences of the U.S. trade tariffs/taxes has been the global slowdown in “investment spending,” which is partly a direct consequence of the tariffs/taxes.

Generally speaking, when you tax something, demand for that thing will then go down, but that has been made worse by the general policy uncertainties surrounding possible future trade tariffs/taxes with the potential disruption to supply chains that would imply.

Capital spending in the OECD has slowed dramatically as a result in the last two years. We have seen this on a smaller scale before in Italy and the pattern is seemingly repeating now at a global level.

Besides all that, the U.S. consumer has every reason to keep supporting the U.S. economy as last Friday’s employment report demonstrated, but growth will struggle to return to trend unless there is some kind of normalization on investment. The problem there is that trust has been damaged and it can be quite tricky to repair that damage.        

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective,” Fed Vice Chair Richard Clarida said in a prepared speech.

In simple words, if nothing abnormal happens in the foreseeable future, further rate cuts are not highly likely.

All this is important for investors as the two other most important Central Banks in the world, the European Central Bank (ECB) under its new President Mrs. Christine Lagarde and the Bank of Japan (BOJ) seem to stick with their “loose” monetary policy doctrines for quite some time to come.

By the way, Christine Lagarde, the new president of the European Central Bank (ECB) defended last week publically the policy of very low interest rates to support the activity rather than pay better savers.

When asked about the negative effects of near-zero or even negative rates on the remuneration of savings, she wondered about “what would have happened if the ECB had not done that,” en24.news quoted her as saying.

In the foreign-exchnage market I can’t see a stronger euro against the dollar for some time to come.

The Fed will also need to see very concrete weakness before they’ll decide to undertake further steps to ease the Fed funds rate more.

In this context it could be of interest to take note that the chance of rates falling to 1 percent or lower by September 2020 from the current 1.5 percent-1.75percent range has dropped from 75 percent two months ago to 26 percent on Friday, The Wall Street Journal reported.

All this implies that the equity markets in the U.S., but also globally will have to take that into account.

Finally, investors could do well not getting distracted too much by all the “impeachment noise” and keep in mind that under the U.S. constitution, only the Senate can conduct impeachment trials and a conviction requires a two-thirds majority. Currently, the Republicans hold the majority in the Senate.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors could do well not getting distracted too much by all the “impeachment noise.”
economic, growth, consumer, trust
Monday, 04 November 2019 09:41 AM
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