11 May 2018
China to speed up “Made in China 2025” plan

Possible collapse of trade talks is likely to increase uncertainty for Chinese production. But we've kept our GDP growth forecasts unchanged as we expect investment in “Made in China 2025” to offset any potential loss from net exports

We are sceptical about the outcome of trade talks between China and the US over the coming months.

According to media reports, the US demands are mostly related to China's national strategy, “Made in China 2025”. Given that China maintains these demands are unreasonable. Therefore, it is difficult to see Vice Premier Liu He's forthcoming trip to the US yielding any tangible results. The most likely outcome for the second round of trade negotiations will be a stalemate.

Global outlook: Papering over the cracks

As trade tensions mount, is the global economy heading into a storm? Read our latest economic update to see what our economists and strategists are thinking

Papering over the cracks

2017 provided plenty of upside growth surprises, which may have led to some over-optimism about the prospects for 2018. But the story isn’t helped by growing trade tensions, with China and Europe so far rebuffing US demands to do more to cut the latter’s trade deficit. The coming weeks will be critical for the negotiations, with deadlines of May 22 for China and June 1 for Europe, after which tariffs may well be implemented. Markets will have to hope the pattern of Trump making big demands as an opening gambit before accepting more modest moves repeats itself.

FX: Re-connecting with rates

Last month saw the dollar strengthen, dramatically re-connecting with interest rate spreads. But we still think the dollar will weaken come the end of the year and into 2019

Whether it was the two-year EUR:USD swap spread moving through the psychological 300bp level or a brief respite in Trump’s twitter account, the last month has seen the dollar dramatically re-connect with interest rate spreads. This has caused substantial problems for investors positioned for a benign dollar trend and emerging market growth stories. While we have been forced to upgrade our dollar profile for this summer, we still think the dollar will be weaker by year-end and throughout 2019.

Interest rate spreads had little bearing on the dollar trend between last September and this March. But that all changed from mid-April onwards, which has now seen the trade-weighted dollar reclaim all of this year’s losses. We believe the severity of the move primarily owed to positioning – our long-held dollar bearish had very much become mainstream this year – and probably higher oil prices driving US rates higher.

UK: Carney goes cautious

As Bank of England opts to keep rates on hold this month, have markets interpreted the overall tone of the meeting as more dovish than anticipated?

It’s fair to say the build-up to the May Bank of England meeting was a rollercoaster. Having more-or-less fully priced in a May rate hike, markets received quite a shock following cautious comments from the Bank of England Governor Mark Carney a few weeks ago. In the end, this concern was probably what saw the Bank keep rates on hold, which was all the more surprising given other BoE rhetoric so far this year, which had appeared to guide markets to a more rapid path of tightening.

Eurozone: Reality check

Growth expectations had become too optimistic though weaker 1Q growth is partially due to one-offs

In 2017, the Eurozone surprised the markets to the point that expectations for 2018 were scaled up continually. However, news since the beginning of the year has brought back some realism. As we have already signalled, peak growth for the Eurozone now seems behind us, though the first quarter could have been slightly stronger if there hadn’t been a number of one-off effects. At the same time, core inflation has unexpectedly fallen back to only 0.7%, which increases the probability that monetary policy will stay loose for longer than markets had anticipated.

Rates: EM eyes the dollar

As the dollar whipped into a strengthening mode, emerging markets have been spooked 

Many moving parts make for tough interpretation, but one theme runs through the middle, and that has been the path of the dollar. And moreover, the speed at which it flipped from a gradual weakening trend that had an inevitability about it, to showing a wicked strengthening streak. It is one that has in a flash exposed vulnerabilities stretching from the likes of Argentina to Turkey to Indonesia. Emerging markets (EM) have been spooked.

Japan: Slow start

It is becoming quite “the thing” to start the year weakly… but with Japan there is genuine room for optimism

It is becoming quite “the thing” to start the year weakly. The US does it almost every year. Europe also seems to have recorded a soft patch in 2018. Japan, too, seems to have started the year in a less than convincing fashion. Consensus opinion has Japan growing at only 0.5% quarter-on-quarter in 1Q18. It is easy to blame bad weather for economic weakness, only for it to turn out that the economy was genuinely weak all along. But in Japan’s case, we think there is genuine room for optimism.

US: Stormy relations

Growth looks set to pick up again in 2Q18, but geopolitical tensions remain and the Republicans look vulnerable ahead of the mid-term elections

As with most major economies, the first quarter of 2018 didn’t pan out quite as well as hoped. Bad weather, an aggressive protectionist lurch and financial market volatility all played a part, but it looks as though a stronger story is emerging for 2Q18. Nonetheless, geopolitical and trade tensions persist, as underlined by President Trump pulling out of the Iran nuclear deal. These steps seem to be bolstering Trump’s approval ratings despite ongoing media scrutiny of his personal life. The Republican Party is not benefiting though. Polls suggest they will lose control of Congress, which would severely curtail Trump’s legislative ambitions in the second half of his Presidential term.

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ING’s May Economic Update

Key takeaways from our monthly economic update

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