Tuesday 31/03/2020

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Monthly economic outlook

Chief Economist

The wider Brexit fallout remains limited, at least so far. While overall confidence has picked up slightly, our global composite sentiment indicator suggests that global economic activity is still weak. Encouragingly, there is a growing awareness about the need for more expansive budgetary policies. This should translate in stronger economic activity and higher inflation prints. At the same time, statements remain vague implying that actual implementation might take time. Meanwhile, downward risks remain substantial.

  • In the United States, following a very weak start of the year, growth in Q2 disappointed again, implying that a September rate hike is probably off the table. That said, when corrected for inventories, GDP growth came in above 2% annualized. Household consumer spending is growing at around 2% in year-on year terms and several factors, including disposable income growth, consumer sentiment and the relatively favorable housing and labor market backdrop, all suggest consumption growth should hold up. Overall productivity growth remains very disappointing and the outlook for investment remains weak against the back of negative profit growth and relatively low capacity utilization rates. This is a key risk factor for the US economy.
  • Following a solid start of the year, Eurozone economic growth moderated in Q2. Encouragingly, most confidence indicators in the immediate aftermath of the Brexit vote are holding up. This suggests that the fallout on Eurozone economic activity remains limited, at least so far. Admittedly, trade negotiations between the UK and the EU still need to start and this looks set to be a complex and prolonged negotiation process against the back of a challenging political calendar with Dutch, French and German elections in 2017.  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, keeping monetary policy in easing mode for longer. 
  • In Japan, despite sluggish economic activity, JPY appreciation and falling stock prices, the BoJ basically refrained from adding stimulus in its late July meeting. Meanwhile the Abe government announced a new fiscal stimulus package of 28.1 trillion JPY (around 5.6% of GDP). That said, only a fraction of that constitutes fresh public spending (7.5 trillion JPY of which 4.6 JPY in 2016), so that all talk of big fiscal stimulus is vastly exaggerated. It should nevertheless translate in somewhat higher GDP numbers next year.  At the same time, indicators suggest it remains very doubtful whether inflation will pick up meaningfully going forward so that the BoJ is still likely to add monetary stimulus in the near future. 
  • Sentiment towards emerging markets has improved in recent months against the back of reduced USD strength and stabilization in commodity prices. But EM are not out of the woods yet. China’s challenging rebalancing exercise and uncertainties linked to monetary policy tightening in the US could easily expose more EM weakness. Additionally, recent developments in Turkey, Russia and Brazil remind that political risks are real in some EM. And more recently, commodity prices are experiencing downward pressure again. All this implies that EM are not up for a rapid recovery. 

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