2Economic Research Global Data Watch August 31, 2018 JPMorgan ChaseBank 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 to improve as waning US fiscal stimulus and further Fed ratehikes are expected to slow DM growth. It would be a mistakeat this stage to express a strong view on EM financial condi- tions. However, it is encouraging to note that the forces thatoften magnify credit problems—terms-of-trade losses thathurt EM corporate profits and broad EM central bank tighten- ing—are notably absent in the current episode (Figure 3).NewFTA: It takes three to tangoEscalating trade tensions pose an important downside risk tothe 2019 outlook and it is hard to decide what to make of thisweek’sdevelopments.After several weeks of bilateral talks,the US and Mexico reached an agreement on the more con- troversial chapters of NAFTA. Encouragingly,the US sof- tened itstone on dispute resolution and the sunset clause,whileMexico agreedto some increase in national content,modifiedrules of origin, and increasedwages in the auto sec- tor. However, the trilateral outcome remains uncertain.WithCanada having had less than a week to negotiate still- contentious issues—on steel and aluminum tariffs, on disputesettlement, and on dairy—it is unlikely a deal will be com- pleted for this week’s deadline. This does not imply that nego- tiations will break down. The US and Canada can continue totalk for 30 days following the administration’s notification ofa deal to Congress. While our base case is that NAFTA sur- vives, therisk of a derailment remains high despite thisweek’s forward motion.At the same time, there has been little progress in US talkswith China and it now looks likely that tariffs on an additionalUS$200 billion of imports from China will be announcedsoon. Also President Trump appears to have rejected an EUoffer to scrap tariffs on autos. While the rise in tariffs is in- corporated in our baseline forecast, a significant shift in busi- ness sentiment related to a NAFTA breakupor the impositionof tariffs on US auto imports from the EU is not. In all, tradetensions remain a wild card and a downside risk to the out- look.DM core inflation highest since 2008 Incoming data support our forecast thatDM core CPI inflation will rise gradually. After dipping to 1.3%oya in the middle oflast year, core inflationreached 1.6%oya in July, matching itscycle high (Figure 4). While this upward trajectory is com- mon across the region, there is wide dispersion. In the US,core inflation is aligned with the Fed’s objective, with coreCPI inflation at 2.4%oya and core PCE inflation at 2.0%oya.Canada is in a similar position, as is the UK. However, coreinflation registered just 1%oya in theAugust report for theEuro area and it is 0.3%oya in Japan (theAugust reading forTokyo points to a 0.4%oya nationwide reading).Inflation isdrawing support from high and rising rates of resource utiliza- tion. The DM unemployment rate declined to 5.0% in July,the lowest since April 1980. The unemployment rate is closeto or below our estimate of the NAIRU in each of the majoreconomies, including the Euro area, which recorded an 8.2%reading in July. Tight labor markets are promoting faster laborcompensation gains. Against a backdrop of low productivityincreases, this puts upward pressure on unit labor costs.DM core inflation has also been supported by the synchro- nized acceleration in regional GDP growth in 2016-17, which promoted a vigorous recovery in global goods-sector activityand stabilization in EM exchange rates. Against this back- drop, DM core goods prices have staged a modest recoverythis year. From the standpoint of the outlook, the abrupt drop- off in EM growth toward the lows of 2015-16 in the middlequarters of this year is cause for concern. Sustained weaknessin EM growth likely would feed through to the DM econo- mies via weaker import demand and currencies, sapping pric- ing power. Indeed, our EM effective exchange rate is downalmost 4% since the start of the second quarter.A German-led pickup in Euro area industry The downshift in Euro area manufacturing output in the firsthalf of the year was more pronounced than the downshift inGDP. The sector slumped from 6.6% ar average growth in 。。。。。。