2Economic Research Global Data Watch November 23, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan data to show a narrowing in global growth differentials—withthe US moderating, the Euro area and Japan lifting, and Chinastabilizing—alongside a sizable rebound in global manufac- turing output from its 2% annualized pace of gain over thepast two quarters. The signal from the latest reports is any- thing but clear about how these dynamics are playing out.Global output reboundsbutmanufacturing PMI slides.Incoming releases point to a strong October manufacturingoutput gain, on track for the expected rebound to a 3% argain in global output this quarter (Figure 1). However,based on this week’s flash readings, the November globalmanufacturing PMI will move lower and signal global out- put gains at less than a 2% ar. US iscooling. The US economy appears to be cooling fromits rapid 3Q18 pace—which we expect to be revised to a3.7% ar next week—toward the 2.5% ar we forecast for thisquarter. This week’s October durables report suggests thatbusiness investment is rebounding from a soft 3Q, and nextweek’s personal income report should show that real con- sumer spending gains remain strong. However, we antici- pate a substantial drag from international trade alongsidecontinued contraction in housing. The recent decline inbusiness surveys and rise in jobless claims suggests thatoverall growth is slowing. Euro area PMI slides again.We have maintainedthe viewthat the Euro area’s underlying growth remainsaround 2%. Through September, the regional composite PMI bolsteredour confidence. But a1pt slide in the PMI in October hasbeen followed by a 0.7pt decline in the November flash. At52.4, the composite PMI is now consistent with underlyinggrowth of 1.5% ar. As the PMI can deviate fromconcen- trated swings in activity,this report does not challenge ourforecast for a current-quarter growth rebound (to a 2.5%ar)as drags in the auto industry fade. However, the signal forthe underlying trend is more concerning and points todownside risks to our forecastfor GDP to rise 2% nextyear. Tempering this message isthis week’s November na- tional surveys. Business confidence readings from theFrench INSEE and the Belgium BNB survey moved higherlast month.If next week’s German Ifo survey holds close toits current level (we look for a small decline) an unusualgap will have opened between the PMI and national surveys(Figure 2).Better but noisy news from Asia. In contrast to the Euroarea, recent reports from Asia have been largely positive.Having already seen supportive signs that China’s growth isstabilizing around 6%, this week saw strong October activi- ty readings from Japan and Taiwan. In Japan, export vol- umes rebounded strongly last month, confirming that earlierweakness reflected disruptions from natural disasters. Im- port volumes also grew rapidly and point to a pickup indomestic demand. In Taiwan, export orders rose a stronger- than-expected 2% and factory output jumped 5% last month(Figure 3). The Taiwan data underscore a boomy reboundin the tech sector, with output surging nearly 50% annual- ized in the three months through October. However, thetrend in non-tech spending remains lackluster. WhetherTaiwan’s tech rebound reflects a temporary boost in antici- pation of US tariffs on China is an open question. We lookto next week’s October IP reports from Japan and Korea toprovide further guidance on the significance of the positiveturn in regional activity.Fed and ECB to stay on course With these developments occurring alongside equity pricedeclines, attention turns to Fed chair Powell’s speech nextWednesday. It is reasonable to expect himto tone down talkabout the need for restrictive policy next year, focusing onrising uncertainties and data dependency, but the narrativearound moving toward a neutral stance is unlikely to be al- tered. Similarly, the ECB will likely stay the course on endingQE in Decemberwhile maintaining its forward rate guidance.The upcoming ECB meeting could send more dovish signalsif the staffrevisesdown its growth and inflation projectionsfor next year, or Draghicommissions alook into the TLTROroll down. We think there eventually will be a two-yearLTRO to deal with the roll down issue, but not until nextsummer;the ECB is not going to announce a new LTRO inresponse to data weakness or to rescue Italian banks. Oil price drop: A blessing or a curse The persistent rise in the price of oil from mid-2017 through3Q18 had become a headwind to the outlook. This has re- versed rapidly in recent weeks, with the price of Brent drop- ping below $60/bbl for the first time since mid-2015. Thedrop turns what was a drag on consumer spending growth into-15 -10 -5 0 5 10 15 20 25 30 2013201420152016201720182019 %3m3m, saar Figure 3: Taiwan IP and exports Source: J.P. Morgan Export volumes IP 3Economic Research Global Data Watch November 23, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan a material support. Indeed, with the outlook assuming oilprices nearly $15/bbl stronger, there is now sizable downsiderisk to monthly consumer price inflation over the coming fewmonths—with the %3m/3m pace of inflation potentially slow- ing to as low as 1% annualized in 1Q19.Assessing the influence of oil price moves on the outlook isalways complicated by the need to determine whether thecause is supply or demand forces. There is a strong case tobelieve that this decline largely reflects two supply side de- velopments: an unwind of concerns over supply that had builtin the lead-up to the imposition of sanctions on Iran,and the addition of over 2mbd to production bythe US, Russia, andSaudi Arabia over the last six months. While we believe thatOPEC will announce material production cuts at its December6-7 meeting, which will push Brent crude prices back above$70 by year-end, uncertainty looms large. If oil prices stayclose to their current level, the resulting boost to growth couldbe sizable—potentially lifting real consumer goods spendingto a 5% ar next quarter (Figure 4). Adding to the usual oil-price identification problem, however,is that the impact of falling oil prices on the US is less clearthan it had once been. Given the rise of US production, fallingoil prices can exact a heavy and concentrated toll that tempersor even offsets the boost to purchasing power. Indeed, whilemuch of the fall in oil prices in 2014-15 was supply related,the drag on the US oil market and resulting stress in high- yield credit markets spilled over to the broader economy.Over this period, global real consumer spending growth un- derperformed what we had thought would have been a strong- er response. With finances in the US oil sector not nearly asstretched as they were in 2014, the net effect of the recent oilprice decline should still be a positive for global growth. Italy and EC entering low-intensity conflict This week the European Commission (EC) took the first stepin initiating an Excessive Deficit Procedure (EDP) againstItaly. If approved by the European Council, the Commissionwill set Italy fiscal objectives and will monitor whether thoseobjectives are being met.Italy has not breached the 3% deficitbut is likely to fall afoul of the rule requiring debt to be on apath toward 60% of GDP. Although the government forecastsa decline from 130.9% of GDP this year to 129.2% next year,the Commission thinks this is too optimistic given the pro- spect for weaker growth, higher financing costs, and lowerprivatization receipts. EC enforcement allows for financialsanctions at any stage, but we believe the Commission wouldlike to keep negotiations to a low-intensity conflict. As a re- sult, we think objectives are not likel