Research Viewpoint

Viewpoint : Strengthened expectations for a moderate acceleration

Viewpoint Data released at the turn of the year strengthened expectations for a moderate acceleration of economic activity at the global level in the euro area in 1H 2020……

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Intesa Sanpaolo – Research Department


– Data released over the past three weeks were very much in line with our assessment of the outlook for the global cycle.

The modest drop of the global manufacturing PMI from 50.3 to 50.1 confirms the stabilisation of industrial activity, albeit markedly mixed in geographical terms.

For what concerns the services sector, the global index improved to 52.1.

Therefore, overall economic activity may have strengthened further. In the United States as well, PMIs were more robust in the services sector than in the industrial one

. The New York Fed and Atlanta Fed’s GDP Nowcasts point to a reacceleration in December.

– Data on global trade available up to end of October outline a stronger monthly trend for both imports (2.2% 3m/3m) and exports (-0.2% 3m/3m), sending the first signs of a stabilisation, after the drop caused by the trade dispute between the United States and China.

Furthermore, the foreign demand index included in the global PMI survey rose further, to 52.4 in December, promising an additional pickup of trade flows between the end of 2019 and the beginning of 2020.

Subsequently, year-on-year changes will be inflated by base effects, as the months in which import-export flows adjusted to higher tariffs will no longer be considered in the comparison.

The likely signing of a Phase 1 agreement between China and the United States, and the ratification of the withdrawal agreement governing the United Kingdom’s exit from the EU (due to be approved by the House of Lords on 27 January) have removed two important sources of risks from the near-term horizon.

– European data generally beat expectations, as testified to by the positive levels reached by the CESI economic surprise index for the euro area.

The composite PMI improved further, driven by the recovery in the services sector.

Business confidence improved across sectors except industry, where it remained stable. German industrial output in November also surprised on the upside (see below The Week in review).

Considering all the above, we believe Eurozone GDP growth probably remained at around 0.2% q/q in 4Q 2019 as well, with the year-on-year rate at 1.1% y/y.

Therefore, the risk of a recession remains low, at least in the near term.

Will mounting tensions between Iran and the United States spoil the party?

Unlikely, in our view: we do not think the situation will evolve in the direction of a conventional conflict, nor that tensions will seriously disrupt oil exports from the region.

Furthermore, the flexibility of shale oil and abundant overall supply make the market more resilient than it was at the time of the Gulf wars.

– Tensions between the United States and Iran, which had mounted significantly ever since the US decided to pull out from the Iran nuclear deal, spiralled suddenly over the past few weeks following a chain of reprisals and counter-reprisals.

The conflict evolved from being indirect and by proxy to direct. Tensions came to a head on 3 January, with the killing of a high representative of the Iranian military, General Soleimani, an operation officially conducted by the US government.

– We with the crisis is unlikely to degenerate into a conventional conflict between the two countries.

Iran is better positioned to pursue its ambitions as a regional power through the multiple organisations it controls or supports throughout the Middle East, attempting at the same time to accelerate its plans to develop a nuclear deterrent.

For the same reason, in the absence of imminent threats to its survival, the Iranian government is unlikely to choose the course of blocking the Strait of Hormuz, a move which would make a reaction inevitable, while failing to afford decisive strategic advantages to Iran.

On the opposite side, the United States administration has never seemed inclined to run the risk of engaging in a conventional conflict on a large scale, either – although President Trump’s whole-hearted re-edition of Nixon’s “Madman Theory” may, at times, seem to indicate otherwise.

– This view is supported by the latest developments. Iran responded to the assassination of Soleimani in a very measured manner, without causing casualties and allowing the United States the chance of ending the military escalation honourably.

An opportunity the US administration promptly welcomed.

– Obviously, this does not mark the end of the Iranian question. The crisis is likely to return inside its previous confines, albeit with Iran keener than before to create difficulties for the United States throughout the Middle East, at a time in which American influence is already clearly waning.

The main risk, as pointed out by several political analysts, is that potential actions conducted by militia tied to Iran may prompt new reprisals from the United States, a development which could recreate the situation seen at the beginning of the year.

Even in the event of an escalation, however, the implications for the oil market could be much more modest than during past periods of conflict in the Middle East.

First of all, the supply of oil is overabundant at present, with ample margins guaranteed by additional extraction capacity that could be activated by OPEC countries in case of problems, stocks only 6% below the peak levels hit in July 2016 and forecast on the rise, and additional production flexibility allowed by shale oil, not available at the time of the Gulf war


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