Can the “Green Shoots” survive the winter?

Trade war or peace? Growth or gloom? How does the macro environment look going into the end of 2019 and the start of 2020?

Posted by Saad Rahim on December 03, 2019

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The term “Green Shoots” is used by market commentators to describe a situation where it appears economic data are getting better after a period of weakness. After seeing manufacturing, trade and growth either slow down or outright contract all year, it now looks like there might be some signs of improvement. Part of the reason for this brighter outlook is that one of the biggest drags on growth this year, the trade war between the US and China, appears to be heading to a positive resolution. If that does come to pass, and both sides start to remove the tariffs that they have put in place, then we should start to see a resumption of global trade flows and manufacturing output. 

While the tariffs have not yet caused a major slowdown in consumer spending, at least in the United States, they have certainly caused widespread pain in the manufacturing sector, including and especially in the European industrial sector. That pain in turn weighed on commodity demand this year, as we saw weak demand for everything from Oil to Copper and from Zinc to LNG.

But it looks like the combination of well-timed Federal Reserve interest rate cuts and a thawing on the trade war front has proven a potent combination. While growth metrics outside the US cannot be described as strong yet, at least they have stopped deteriorating. Indeed, the latest manufacturing data out of China show a tentative move back into expansion, while similar data from Europe, Japan, India and elsewhere point to a similar story.

The key question, as it has been for most of the year, is whether the US consumer can continue to save the world. Despite the increase in tariffs, rising uncertainty and overall market volatility, the US consumer has continued to spend, which has prevented the world’s largest economy from falling into recession as opposed to merely slowing down. This in turn has kept the world as a whole from falling into recession, despite multi-year lows in economic growth metrics across the world. So, will Fed rate cuts and low unemployment be enough to keep the US consumer going next year?  And, by extension, keep the rest of the world afloat?  It all depends on whether we see a Phase 1 deal that includes a removal of at least some if not all of the tariffs currently in place, and whether consumer confidence can match what has been a strong run. If the answer to the questions above is “yes” then we should see a rebound in commodity demand and prices next year.