Economic and Strategy Viewpoint - August 2018
This month we look at why the world economy is entering a spell of slower growth, explore some of the consequences of Brexit and explain why currency war concerns are overblown.
Global: Summer lull?
- Concerns about China, weaker commodity prices and a stronger dollar signal a spell of slower growth for the world economy. The trade wars are likely to have created a boom and bust as importers front loaded their spending to avoid higher tariffs and are now cutting back.
- Unless the trade wars undermine business confidence and investment the world economy should recover, but the combination of trade tariffs and tax cuts is likely to bring higher inflation in the US.
UK: Brexit consequences brought into focus
- The UK government has finally outlined its proposed future relationship with the EU, allowing negotiations to progress with little time remaining. Both sides of the Brexit debate are at war, and the prime minister's compromise pleases nobody.
- The proposal is seen as a ‘soft’ option for manufacturers, as it pushes for a free trade deal and frictionless borders. However, services are facing a very ‘hard’ Brexit, with no trade deal being pursued. This is likely to be negative for financial services, especially investment banks.
- The consequences of Brexit have come into focus, with the chance of a no-deal or cliff-edge Brexit as high as 35–40%. However, our baseline view (60–65% chance) is that the UK moves into the transition period from the end of March 2019.
No, China has not started the currency wars
- Recent concerns around Chinese currency weakness are overblown; this is not an opening shot in a currency war.
- Devaluation is a policy option for China, but it carries sufficient risks that it will be a weapon of last, not first, resort.
Views at a glance
- A short summary of our main macro views and where we see the risks to the world economy.
The full document is available below.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.