shanghai

In the Eurozone, China and the UK, purchasing manager indexes for the manufacturing sector declined in February. In the United States, in contrast, the manufacturing ISM rose but still held below 50, the level separating industrial expansion from contraction. These figures provide one of several illustrations of the slowdown in world economic growth in recent months. The United States, the Eurozone and the UK are trying their best to withstand headwinds (slowing growth in China, recessions in Russia and Brazil, pressure on oil producers, and questions about corporate debt levels in the emerging countries), but doubts persist. The OECD revised downwards its growth forecasts for the world economy, the US, Europe and several other countries. Following the G20 summit meeting in Shanghai, IMF chair Christine Lagarde insisted that the “uncertainty and increasing downside pressures could put at risk the global economic recovery” and that actions at the national and international levels were necessary. Infrastructure projects were mentioned, but there is little fiscal manoeuvring room. Structural reforms were also brought up, but implementation takes time. The focus has inevitably turned to classic solutions, namely monetary policy. The first half of March will be very busy with the ECB meeting on 10 March, the Bank of Japan on 14 and 15 March and the Federal Reserve on 15 and 16 March. In the run up to these meetings, China will open the 12th National People’s Congress this week, which is expected to clarify the country’s growth targets as well as initiatives to meet these targets and to restructure the economy. Given China’s importance for the world economy, and – as we have observed since summer 2015 –for market sentiment as well, we can hope there will be some clear and convincing announcements, even though it is hard to foresee what form they might take. In contrast, things seem much simpler for Japan’s central bank. After introducing a negative deposit rate just a few weeks ago, the Bank of Japan is bound to maintain the monetary status quo while it waits to see how the markets and the economy react. It is much harder to predict the results of the Federal Reserve meeting. Despite a certain lull in the equity markets, the bond market does not believe in a tightening move (nor do we). There is still suspense, however, over the Fed’s message. Will Janet Yellen provide any indication of her intentions for the months ahead, passing silently over the phrase that policy will be data dependent? I fear not. And that bring us to the ECB. It has the hardest task, not because it will be the first of the three central banks to announce its decision, but because expectations are so high that it will be hard to surprise the market (without a favourable surprise, the euro could rebound). The ECB is also in the uncomfortable position of needing to act given the absence of inflation and the decline in the market’s inflation expectations, yet knows that moving the deposit rate further into negative territory will not be welcomed by everybody, and that there are limits to increasing government bond purchases. 10 March looks like a key date.