2
Economic Research
Global Data Watch
June 22, 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
increased, but is limitedby supports expected to come in
2H18 from stronger US demand and likely policy easing in
China.
The second challenge to our upbeat global growth forecast
comes from the recent intensification intrade tensions. Last
week’s announcement of new US tariffs on China has been
followed by a broad-based global response to US tariffs on
steel and aluminum. These actions might be seen as a tit-for-
tat exercise not large enough to have a material macroeco-
nomic impact at a country or global level. However, US rhet-
oric is ramping up, threatening a wider range of tariffs and
investment restrictions on China and raising tariffs on US auto
imports from the rest of the world. Taken together these items
would increase tariffs on more than 30% of US imports, an
amount that represents almost 5% of US GDP (Figure 2). At
the extreme, this continued back and forth could deliver both
a global supply shock (raising inflation and lowering growth)
and a breakdown in international institutions.
This “trade war” threat remains a low probability event, in our
view, and would likely only evolve over time. However, its
consequences are significant enough that it is now weighing
on global risk appetite. The key outlook issue is whether it
materially dampens 2H18 business confidence and spending.
This week Chair Powell noted that in response to rising trade
tensions “for the first time, we’re hearing about decisions to
postpone investment, postpone hiring.”This concern is ech-
oed in the June US flash PMI, which showed a precipitous
drop in manufacturers’ output expectations (Figure 3).
China policy as a counter-cyclical cushion
Although China’s policy is set to support its own objectives,
over the past three years it has moved counter-cyclically with
broader swings in EM demand. Starting with the 2015 curren-
cy regime shift, China's policy turned stimulative and cush-
ionedan EM weakening phase.
The tables turned in late 2016 as both China policy and EM
demand cycles shifted. With China’s economy now slowing
and facing risks from an intensification of the trade conflict
with the US, policy is easing once more. The central bank is
taking steps to boost bank lending, especially to SMEs, to
mitigate the drag on fixed investment from the crackdown on
shadow lending. The PBOC recently has injected liquidity
into money markets and left its short-term lending rate on
hold, no longer following the Fed. We think these actions will
be reinforced by a series of three RRR cuts, the first of which
should be delivered in the next few weeks, and a relaxation of
loan quotas. We expect the central government to take the
lead on easing fiscal policy whereas we think the stricter regu-
lations on local government financing will remain in effect. In
addition to increased infrastructure spending, China could
raise tax refunds for exporters, from around 9% currently to a
maximum of 17% (the VAT tax rate) should the higher US
tariff rates take effect.
We expect China to exercise caution with regard to the cur-
rency. Although the CNY has depreciatedin the past two
months, this has happened in conjunction with the 5% appre-
ciation in the trade-weighted US dollar. Put differently, the
trade-weighted yuan has not declined over the period. If the
currency were tocome under more intense depreciation pres-
sures, then it is likely that the current easing bias in monetary
policy would need to be reversed and support to the economy
would need to be borne by fiscal policy. Fears of CNY depre-
ciation was a key factor behind the large capital outflows in
2014-15 and the authorities are unlikely to risk this being re-
peated.
ECB and BoE send divergent signals
In Western Europe, the latest communications from the two
major central banks produced divergent surprises. Last week
the ECB delivered a dovish message that it expects to keep
policy rates on hold at through at least summer 2019. In a
speech this Wednesday Draghi went considerably further,
1.7
15.4
30.9
0.32.3
4.61030
$50bn China
imports
$450bn China
imports
$900bn: China
imports and
all autos
ImportsGDP
%, 2017 nominal values
Figure 2: US goods spending potentially affected by tariffs
Source: BEA, Census Bureau, J.P. Morgan
-4
-226
60
65
70
75
80
85
2013201420152016201720182019
Index, sa (June is flash)
Figure 3: US manufacturing output and PMI output expectations
3m/3m,saar
Source: J.P. Morgan
PMI future output
Mfg outputEconomic Research
Global Data Watch
June 22, 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
saying the very flat term structure of money market rates is
consistent with the ECB’s plans to move slowly once it starts
hiking. The inconsistency between the ECB’s forward guid-
ance and its stated inflation objective can be seen from the
evolution of real interest rates signaled by the central bank,
which would remain near -1.5% through 2020 even as the
unemployment rate nears a 40-year low.
By contrast,at this week’s policy meeting,the Bank of Eng-
land delivered a hawkish message that significantly raised the
odds of an August hike. Three members of the MPC, includ-
ing Chief Economist Haldane, dissented for an immediate rate
rise. The MPC gave a positive interpretation of the dataflow,
expressing confidence that growth is likely to rebound this
quarter in line with its forecast following an unexpected slow-
down in 1Q. The hard data still need to deliver on the im-
provement suggested by recent business surveys, with a focus
on the monthly GDP release for May due on July 10. In a sim-
ilar vein, following its meeting the Norges Bank announced it
expected to hike rates in September, in line with our forecast.
Previously, the Bank merely said sometime “after the sum-
mer.”
EU keeps the plates spinning (but only just)
The EU finds itself with myriad challenges demanding urgent
attention while its progress dealing with them is distinctly
mixed. Eurogroup ministers agreed this week on a package of
maturity extensions on Greek debt and additional near-term
funding to help Greece build up a cash reserve as it returns to
markets, which should allow a program exit in August. Next
week’s leaders’ summit will see the launch of yet another
timetable for Euro area governance reforms. Among the ini-
tiatives France and Germany have agreed on are reform of the
ESM to allow it to backstop the single resolution mechanism
and the creation of a specific Euro area budget. But the scale
of the latter is likely to be small and Germany continues to
insist that sovereign debt restructuring remains prominent
among the tools for countries requiring support. Meanwhile,
attempts to formulate a region-wide approach to dealing with
immigration and to allocate the burdens arising from it more
equally across countries have floundered. Another attempt to
reach agreement on the issue will be made this weekend
ahead of next week’s summit. With much other than Brexit
for the EU to focus on, at the summit we expect the EU will
restate its position that the UK’s position lacks clarity and
does not provide a viable solution to the Irish border problem
while the clock on