August 2017

Page 3: Central bank hawks, low inflation and balance sheet reduction

• Central banks have taken a more hawkish tone, questioning the level of policy accommodation given the recovery in the world economy. Traditional models such as the Taylor rule support higher rates, but this is challenged by the recent run of low inflation prints.
• The Federal Reserve also has to factor in the effect of a reduction in its balance sheet. This is a step into the unknown and it is difficult to assess the impact. Nonetheless, although the unwind process starts slowly, it rapidly builds up and represents a significant reduction in liquidity by its second year.
• We expect the Fed will proceed cautiously and, when combined with low inflation, we now see little likelihood of further rate rises this year.

Page 8: UK: Employment, wages and interest rates

• The labour market has been key to the success of the UK economy in recent years. However, while employment is at a record high, wage growth remains anaemic. Poor productivity growth is one cause, but so is the changing composition of the marginal worker.
• Meanwhile, we forecast the Bank of England to keep interest rates on hold. Weaker growth of late, coupled with the absence of strong wage rises, suggests there is little need to tighten monetary policy at present.

Page 14: EM Viewpoint: The outlook for global trade

• We assess the outlook for global trade, and conclude that a China-driven slowdown will be only partially offset by Europe. Tailwinds are becoming harder to find.

Page 19: Views at a glance

• A short summary of our main macro views and where we see the risks to the world economy.