8 June 2018
Global outlook: A long, hot summer…

A long, hot summer…

The next few weeks present a number of political challenges that could upset global economic growth and financial market confidence. President Trump continues to ratchet up the rhetoric on trade as he aims to squeeze maximum concessions from Europe and China, but he risks pushing too far as retaliation measures escalate. At the same time, European politics will remain in the headlines as Brexit talks go in circles and Italy potentially tests the EU’s patience

Eurozone: Politics to the fore again

Italian and Spanish politics provided some drama over the last few weeks, while on the international scene trade tensions are growing. However, despite new uncertainties, the ECB seems to be willing to gradually bring quantitative easing to an end

Both Italian and Spanish politics offered some drama over the last few weeks, while on the international scene trade tensions are growing. Eurozone growth is still OK, but not more than that. That means that the European Central Bank’s exit from its easy monetary policy will be extremely slow.

FX: Poor visibility

We are cutting our year-end EUR/USD forecast to 1.23 from 1.30

A cut in our EUR/USD forecast

We are cutting our year-end EUR/USD forecast to 1.23 from 1.30. We also see EUR/USD lingering around the 1.15/17 levels for longer this summer given the uncertainty of global trade policy and also the extent to which European leaders draw the sting out of Italian populism with a more conciliatory approach to immigration, for example.

US: Trading on Trump

US growth appears to be bouncing back sharply in 2Q18, leaving the Federal Reserve on course to hike interest rates three more times this year. Nonetheless, how President Trump proceeds on trade will be critical for both the outlook for US growth and the US political situation

The US experienced its “typical” soft patch in 1Q18, with statisticians continuing to puzzle over the reasons for this multi-year phenomenon. GDP growth slowed to a still very respectable 2.2% from the 3% rates averaged in the last three quarters of 2017, but high-frequency data suggests that 2Q18 GDP growth will rebound above 3%. The Atlanta Fed’s “Nowcast” model suggests it could be as high as 4.8%. We are more cautious given that there is still a lot of data to come, but something north of 3.5% is possible.

Either way, households and businesses appear to be brushing aside market fears of a trade war and the negative impact of higher gasoline prices and mortgage rates. The strength of the labour market and rising asset prices are driving consumer sentiment, which is at levels last seen 18 years ago. 

We look for the Fed to hike rates again on June 13 and also expect them to follow up with additional rate hikes in 3Q and 4Q18

Employment growth is averaging 207,000 per month year to date in 2018 versus the 182,000 monthly average in 2017, and you have to go all the way back to December 1969 to find a lower unemployment rate. Wage growth remains disappointingly soft at 2.7%, but the broader employment cost index is rising more quickly at 2.9% for private wages. All of this coupled with tax cuts equating to around $900 per household; real disposable household income is rising 2% year on year meaning that there is plenty of cash in consumers’ pockets.

Japan: The pause that refreshes

The 1Q18 slowdown was likely only a pause, nothing more, and we anticipate activity strengthening in 2Q18 - barring disasters, such as an all-out trade war

A good-old-fashioned inventory led downturn

In times gone by, when economics still largely worked, central banks maintained a positive interest rate and money printing was considered heretical; there used to be a periodic business cycle. 

This was no bad thing. With every period of growth, along with the beneficial effects such as rising wages, and profits, there would also be some negative spillovers, such as an accumulation of unproductive activity, capacity or inventories. Every five to seven years or thereabouts, there would be a mild downturn or recession. Some jobs would be lost, and some firms would go bust. But the liberated capital and labour from this downturn would mostly be re-shuffled into more productive uses to fuel the next up-leg of the business cycle. In much the same way that we sleep at night to rejuvenate, or tides wash away and refresh the waters along our coasts, the negative short-run aspects of recessions were made up for by the post-recession benefits.

Japan seems to be undergoing just such an old-fashioned inventory cycle right now.

Rates: Italian hiccup for core

We continue to target 3.25% to 3.5% for the US 10-year and the 50bp to 100bp range for the 10-year German Bund (QE decision dependent)

“Quitaly” worries drove Bund and Treasury yields lower. But back now to a re-test higher in rates

The big dip in the US 10-year yield back below 3% was undoubtedly driven by the build of an Italy exit discount. ‘Quitaly’ remains a low probability event, but did require a price discovery exercise. One week later and Italy is still stranded in the 250bp area over 10yr Germany, but the US 10yr yield has managed to recover and now looks to have an appetite to get decisively back above 3% again. Our view is it will, and we remain of the opinion that it will remain above 3% for a number of months, if not quarters.

UK: A summer of tough decisions

Markets have reassessed their Bank of England expectations. But as wage growth rises, we suspect rates hikes are coming

It’s fair to say markets have had quite a big rethink on the Bank of England over the past few weeks. Governor Mark Carney’s surprisingly cautious comments back in April were compounded by what investors interpreted to be a fairly dovish May BoE statement. Markets are no longer looking for a rate hike this year.

We suspect this might have been a bit of an overreaction. Our own read of the May statement was not so different to that of February or March. Wage growth, a central plank of the Bank’s tightening bias, has continued to show signs of life and policymakers remain confident that the tight jobs market will see the upward trend persist.

China: Strongly against a trade war

The US's changing stance towards China is a reflection of its concern about the rise of China. If the US continues its hostility towards "Made in China 2025", future trade negotiations could look rather futile

Trade talks could be futile if the US continues to impose tariffs and sanctions on China

China has become increasingly irritated by a US administration that keeps changing its mind on tariffs. Results from previous negotiations have been taken off the table until the US cancels it’s planned tariffs on China. Media reports suggest that the US could announce its tariff plan by mid-June.

If the US follows through with its plan to announce sanctions on high-tech Chinese goods and related businesses before the end of June, it's also likely that China will take a similar approach to US businesses operating in China.

Clearly then, June looks set to be a tense, rollercoaster month for China-US trade and investment.

Reading time around about 7 minutes

ING’s June Economic Update

The next few weeks present a number of political challenges that could upset global economic growth and financial market confidence. Read what our economists and strategists make of all this

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