Economic and Strategy Viewpoint - July 2018

Trade wars intensify

  • The Federal Reserve (Fed) struck a more hawkish tone at its recent policy meeting while the European Central Bank (ECB) sounded more dovish. Divergent data helps explain some of the deviation, but we also believe that the ECB is concerned about rising bond yields and currency after it ends quantitative easing (QE) in December.
  • The incentive to keep policy loose outside the US has been increased by President Trump's threat to escalate the trade wars. China also eased policy and the yuan has weakened.
  • An escalation in the trade wars means we would have to reduce our growth and raise our inflation forecasts. Markets would have to contend with a stronger US dollar and a more stagflationary environment.

What happened to eurozone growth?

  • Questions remain over the health of eurozone growth. Temporary factors such as the snow storms and influenza epidemics have passed, yet leading indicators have not recovered anywhere near the highs of the end of 2017. What has caused the slowdown and is it likely to persist?
  • The European Central Bank decided to extend QE a little more, but rung the bell to mark its end and the start of a hiking cycle in the second half of 2019. The announcement was a little more dovish than expected, leaving us wondering whether the delay is the latest move in the competitive devaluation of the euro.

What is driving EM currency weakness?

  • We look at recent EM underperformance and its causes. While the dollar is a key driver, trade tensions do not seem to have had the effect one might expect, yet.

Views at a glance

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

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Economic and Strategy Viewpoint - July 2018 16 pages | 472 kb