Global Economic Outlook - September 2018 - Northern Trust - Commentaries

Summary

Cautious Optimism

After months of escalating trade tensions, there have been some constructive developments on the trade front. These include preliminary European Union (EU)-U.S. and U.S.-Mexico trade agreements. Despite these positive signals, trade frictions are far from over.

The U.S. and China, in a tit-for-tat move, imposed further 25% tariffs on $16 billion of bilateral imports amidst trade talks, bringing the current total to $50 billion. Though talks resumed between the two nations, another round of tariffs may be announced this month.

Turkey and Argentina are facing a challenging interval ahead, highlighting vulnerabilities in emerging markets (EMs). Escalating trade tensions and tightening global liquidity conditions may continue to pressure some EMs, but we do not expect them to accumulate in sufficient scale to trouble developed markets (DMs).

Overall, we are cautiously optimistic on global growth, but risks remain tilted to the downside. The following is an overview of what we are expecting in key markets.

United States

The revised estimate for real U.S. gross domestic product (GDP) growth in the second quarter was 4.2%, slightly above the already-strong initial estimate. We expect the economy to continue performing well, recording full-year growth of 3.0% this year.
In 2019, the costs of trade actions will become more apparent and fiscal tailwinds will fade, leading to slower GDP growth and sustained inflation.
Federal Reserve officials have a lot to consider as they contemplate further rate increases. The flattening yield curve is a growing concern, as is international debt sustainability. We expect a rate increase in each of the September and December 2018 meetings of the Federal Open Market Committee, and two additional increases in 2019 before rates reach a steady level.

Eurozone

After a relatively weak first half, economic activity appears to be stabilizing in the common currency region. This underpins our view that the economy will grow at a fairly decent pace this year before the pace of growth slows next year.
After a handshake agreement in July, both the EU and the U.S. are preparing to define the scope of a future trade agreement. However, the EU still has “profound disagreements with the U.S. on trade policies.” Though the EU wants to end all car tariffs, the U.S. wants to incorporate agriculture, a category deemed not open for negotiation by the EU.
Italy will remain a focus in the run-up to October’s budget negotiations with the EU. While the noise from Italy will likely increase, this should not cause a significant disruption in the other European markets.
Speculation around the next European Central Bank president will intensify as Germany is focusing on the presidency of the European Commission when positions become open next year.

United Kingdom

Brexit and sterling will be back on the market’s radar after a quiet, muted summer. September is slated to be busy, with a host of party conferences, Brexit talks and EU emergency summits.
The probability of a “hard” Brexit, defaulting to World Trade Organization rules, with tariffs and hard borders, remains elevated. A “hard” Brexit would result in significant economic costs for all, particularly for the U.K. We continue to expect a breakthrough in the coming weeks leading to a “softer” Brexit that preserves access to the common market.
The U.K. labor markets have tightened, but as in the case of other DMs, this hasn’t resulted in higher wages. Coupled with decelerating inflation (to below 2% by end of next year), slow wage growth will likely limit the Bank of England. Hence, we expect only one rate hike of 25 basis points over the forecast horizon.

Japan

Given moderating Chinese demand and increased trade tensions, external momentum is expected to ease in the second half of 2018. Offsetting this, consumption should benefit from a robust labor market and a recent pick-up in earnings.
The Bank of Japan tweaked its policy a bit in July to make its easing stance more sustainable. At the same time, the central bank also lowered its inflation forecasts. We do not expect a change in the monetary policy stance as the 2% inflation target will remain elusive.

China

Slow credit growth and ongoing trade confrontations with the U.S. will weigh on China’s growth this year. The recent Chinese Yuan (CNY) depreciation should help Chinese exporters partially offset the damage from rising trade tensions. This gain will not be sustained, as Chinese policymakers re-introduced a measure abandoned earlier this year to stabilize the currency.
Financial stability will continue to be a focus for China and for global markets. Credit quality has been in question, with the recent failure of a peer-to-peer lending platform another warning sign.
In the middle of rising trade headwinds, Chinese policymakers will likely continue to implement easing measures to underpin the economy, but without moving their benchmark interest rates.

Global Economic Outlook - September 2018

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