Monday 20/05/2019

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Monthly economic outlook

Chief Economist

Global recession fears have eased over the last two months. That said, our global composite confidence indicator still suggests that global economic activity remains weak.

What’s more, downward risks remain substantial. Meanwhile, despite record low policy rates and huge expansions in the size of their balance sheet, most central banks are still looking for higher inflation prints.

 

  • In the United States, even though most important confidence indicators improved since the start of the year, the US economy is only expanding at a modest pace. And while the pace of job growth has been solid over the past few years, it is still doubtful whether the US labour market is running at full capacity. Wage growth and underlying price pressures are slowly picking up but remain at fairly modest levels. The recent stabilization in commodity prices, the recent USD depreciation and decreased worries about China could provide a window of opportunity to hike interest rates in June but this has become a very close call. More importantly, however, the Fed is likely to proceed gradually and only if the underlying growth momentum remains strong enough.
  • The Eurozone economy expanded solidly at the start of the year. In doing so economic activity has now just passed its pre-crisis peak level, a disappointing run so far. Looking forward, economic activity should hold up against the favourable backdrop of low energy prices, the current low yield environment and EUR weakness. Given the persistence of the large negative output gap, core inflationary pressures are expected to stay very weak. All in all, despite the latest easing measures taken in March, the ECB still looks to experience major difficulties in getting inflation up to its target of 2% anytime soon.
  • Economic activity in Japan is still weak. Wage growth remains subdued despite the tightening labour market. Inflation, meanwhile, remains significantly below the Bank of Japan’s 2% target. What’s more, JPY has seen substantial appreciation in recent months, in turn weighing Japanese stock prices. All this implies that the BoJ firmly keeps its bias towards further monetary easing.
  • Despite early signs of stabilization, economic activity in emerging markets is still weak. The currency depreciation seen in many EM since 2013, should eventually translate in improved competitiveness when combined with further productivity enhancing reforms. To be clear, as mentioned earlier, current financial and economic conditions as well as structural issues will make sure that EM are not up for a rapid recovery. Downward risks prevail against the back of China’s difficult rebalancing process.

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