Recent newsflow has been dominated by the Brexit drama and Italy. But does the continued fall in oil prices, and disappointing GDP data from Germany and Japan, foreshadow a sharp slowdown in global GDP growth?
1. The Brexit drama will continue to drive GBP volatility; when attention returns to Italy, bond spreads will be the focus.
The ongoing Brexit drama confirms the point made by a former UK prime minister that “a week is a long time in politics”. Positive market reaction to cabinet agreement to an EU/UK draft treaty was quickly followed by sharp falls in GBP the following day as a sequence of ministerial resignations suggested that cabinet agreement did not equate to political acceptance. We expect GBP volatility to remain high in coming weeks and domestically-focused UK equities may also struggle. Noise around the Italian situation has temporarily subsided, but could pick up again with comments due from the European Commission on November 21. Market action here will be focused on Italian government bond spreads: we continue to expect the Italian government to be more responsive to sharp moves in these, than to pressure from the European Commission or other EU institutions.
2. The continued fall in oil prices reflects multiple factors. Production levels are rising and demand expectations are falling.
We look at the reasons behind the continued oil price fall on page 8. We see four key reasons for this: rising U.S. (and other) oil production, U.S. sanctions not proving as bad as initially feared, typical negative seasonality and the headwind provided by USD appreciation. But what is also interesting is how expectations around future trends in global oil demand have shifted, quite quickly. An OPEC report published this week showed not only that extra Russian and OPEC output gains were offsetting Iranian production shortfalls. But, as importantly, it also included the fourth consecutive monthly reduction in its oil demand forecast for 2019, pushing oil prices further down in response.
3. Q3 GDP QoQ falls in Germany and Japan are likely to be reversed in Q4. Global GDP growth will slow only slightly in 2019.
Does available economic data suggest a sharp slowdown in global economic growth, and thus oil demand, is in the offing? Not really. Much attention has been paid to disappointing recent Q3 GDP data from Germany and Japan. But, as we explain on pages 3 and 5, QoQ contractions in output in both countries were mainly due to one-off factors: in Germany’s case, car industry woes related to a new vehicle testing regime, and in Japan’s case, earthquakes and poor weather conditions. Both economies are expected to start growing again in Q4. Overall, we think that global GDP expansion is likely to be only slightly slower in 2019 than in 2018 –a dramatic deceleration in growth is not expected.
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