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China weakens further, Turkey in recessionary territory

Weakness in China was broad-based, with the GEAR now reading just 5.4 per cent. Car sales and imports softened materially. All real estate-related components have fallen in recent months, and such tentative weakness after a relatively robust year may prove to be a particularly notable trend going into next year. The economic uncertainty index also worsened significantly, business surveys remained uncomfortably close to contraction, and freight and electricity data kept weakening. Investment was one brighter spot. Exports also remained relatively strong, but perhaps will drop off as ‘front-running’ ahead of US tariffs fades.

Korea’s GEAR’s reading of 1.9 per cent put it close to three-year lows, due to both domestic and external weakness. On the consumer side, expectations weakened, which is reflected in slowing retail sales. On the trade front, export shipments are cratering.

Brazil’s GEAR of 0.3 per cent remained discouraging, as it has for most of the year. Mexico’s GEAR of 1.1 per cent fell for the second consecutive month.

Turkey’s GEAR of -4.9 per cent is deeply in recessionary territory, in line with that country’s third quarter gross domestic product data. The reading suggests that country’s economy is contracting by an annualised rate of around 5 per cent.

The ‘aggregate’ EM GEAR has never compared less favourably to that of developed markets (DMs).

US GEAR stands out

In contrast with the grim picture in most of the emerging world, the US looks set to end the year without any meaningful deterioration in growth from the very strong levels seen all year. Even the other DM GEARs, while not stellar, have shown some tentative signs of stabilisation.

At 3.9 per cent, US GEAR continued to show strength, though edged below 4 per cent for the first time since late 2017. This strength ran counter to the global trend of widespread slowdown. Underlying components were mixed, with business surveys relatively unchanged at high levels, while strong retail sales were offset by nascent weakness in labour market data.

The Eurozone’s GEAR at 1.7 per cent means it has marginally extended its slowdown, having fallen steadily since May 2018. Particularly notable were continued falls in business and consumer surveys, as well as a stall in the previously improving unemployment rate. Weakness was broad-based across the major countries, with Spain the only exception. France’s GEAR at 1.7 per cent was marginally weaker, as the country struggles with protests linked to fuel taxes.

The UK was the exception to any DM positivity. Its GEAR, at 1.3 per cent, has plunged in the past month or so amid the ongoing Brexit woes, and has hit essentially its lowest level since 2013. Retail sales keep falling substantially, as reflected in consumer confidence, which has also dropped. The negative trend in the housing market persists. The rise in the unemployment claimant count continues to be a concern, although this may be partly explained by the introduction of the ‘Universal Credit’ system, a comprehensive social security payment aimed at simplifying benefits.

Looking to 2019, however, our Fidelity Leading Indicator suggests that DMs should continue to slow into the start of the year, and that the US’s fiscal impulse will also start to fade.

Ian Samson

Ian Samson

Portfolio Manager