Monday 22/07/2019

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Monthly economic outlook

Chief Economist

Leading indicators suggest global economic activity remains weak following what has been a very lackluster recovery since the Great Recession thus far. Meanwhile, monetary policy rates are hovering near zero in the Western world. The same goes for real yields on longer term bonds. Headline inflation looks set to rise towards the end of the year while core inflationary pressures remain modest for now.

 

  • Economic activity in the United States is no high-flyer. The manufacturing sector still struggles with the stronger USD and weakness overseas. Confidence in the service sector has also come down. What’s more, productivity growth is stalling and the outlook for investment remains weak against the back of negative profit growth and relatively low capacity utilization rates. May’s disappointing job market report implies that a June rate hike is off the table. All in all, US policymakers are not in a hurry to raise interest rates. Modest growth in combination with below target inflation means that the Fed continues to adopt a very cautious wait-and-see approach as has been the case for several years now.
  • The Eurozone economy expanded solidly at the start of the year. That said, the recovery is still far from spectacular and structural headwinds remain strong. Even though a new political agreement was found in late May, the Greek situation remains structurally unresolved. Confidence in government economic policy is very low in a significant number of European member states. This month’s political agenda will be dominated by the Brexit referendum which should ultimately deliver a ‘remain’ result but this is not a comfortable call. New elections will be held in Spain where coalition formation could still prove difficult. In its June press conference, the ECB stood pat while it awaits the effects of the policy measures announced in March. President Draghi, meanwhile, left the door open to further policy action at a later stage but it should be clear that opposition is rising and also that more monetary easing is no panacea in a liquidity trap situation.
  • Sentiment towards emerging markets has improved in recent months against the back of USD stabilization and uptick in commodity prices. But EM are not out of the woods yet. Chinese hard landing fears have been receding over the past three months and a large one-off depreciation has been avoided, at least for now. But it wouldn’t be surprising to see worries about the sustainability of the current recovery pop up again. Indeed, the background of fake growth figures, soaring house prices and rapid credit growth is far from comfortable and is likely to trigger more concerns about the state of China’s economy.

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