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SMPC votes unanimously to hold bank rate this month
The Global Economy Backdrop:

Julian Jessop referred to his presentation slides. He said he will begin with the global backdrop, then move on to the recent performance of the UK economy, before concluding with a discussion of Brexit risks.

He said that with the focus on Brexit, something that is not often mentioned is that the global economy is slowing. Two indicators are the JP Morgan global PMI output index, and advanced economies and emerging economy GDP growth forecasts. The global PMI is coming off the boil but is clearly still better than 2015-16. Advanced economy GDP growth is expected to slow and growth of emerging economies is expected to cool down. But headline figures are not as informative as the breakdown of the sector movements.

Several sectors stand out as a concern. Potential leading indicators are metals & mining output, basic materials, chemicals, and forestry and paper products. Other weak sectors at the end of 2018 included automobiles and real estate. In both cases, Europe was the main source of weakness. The automobile sector is reacting not just to the issue of diesel but also to the slowdown in China. There has been considerable excess production in the auto sector. Services seem to be holding up relatively well, with the weakness largely in manufacturing.

Reasons for the global slowdown include nervousness in financial markets but this is really a symptom of the underlying economic factors. He said that the key drivers included fading policy stimulus in the US, credit slowdown in China, problems in the auto sector, poltical uncertainty, and high levels of debt.

Trevor Williams said that problems in continental Europe are also key to the weakness being seen in global output, to which Julian Jessop said that the problems in the auto sector figure for Germany, political uncertainty for France, and high debt for Italy. Andrew Lilico said that problems for the auto sector also figure for France. Juan Castaneda said the problems in the banking sector also matter in the case of Italy. Andrew Lilico asked for clarification if the slowdown in the US was also a tightening of monetary policy. Julian Jessop said that this was part of his narrative of a slowdown in policy stimulus, both fiscal and monetary. Trevor Williams said that the shape of the yield curve in the US was signalling a slowdown to below-trend growth there.

There was a discussion about the drivers of the auto sector slowdown and in particular fundamental factors such as low-cost production in Eastern Europe, technological shocks, Brexit, and the downturn in demand from China. However, Julian Jessop said that the common theme of the indicators is that the global economic recovery is relatively advanced and probably due a slowdown.

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