2
Economic Research
Global Data Watch
July 6, 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
This forecast does not ignore genuine risks posed by an inten-
sification of global trade tensions. We believe rising tariffs
will weigh on growth, and industrial activity is likely to bear
the brunt of this drag. However, the tariffs imposed thus far
should not have a material direct impact. A hit to global busi-
ness sentiment is likely to be the key drag. But the size of the
hit uncertain and it is not likely to be felt this quarter.
This suggests a dual tack in this quarter’s global data watch-
ing. At the same time that we track the anticipated pickup in
activity to assess the fundamental health of the global expan-
sion, we will pay close attention to news on trade and its im-
pact on business sentiment. While the latest global PMI shows
a significant fall-off in future output expectations that may be
linked to trade concerns, June surveys of capital spending
intentions actually moved higher in the US, Germany, and
Japan (Figure 3).
Chinais divergent on growth and policy
As US-China trade relations enter a new phase, with US tar-
iffs andChinese countervailing measures taking hold, the two
economies are moving in different directions. While the US
accelerated sharply to a projected 4% ar last quarter, China
appears to be slowing. This slowing reflects the intended ef-
fects of credit policies, which have lowered fixed investment
growthto 6.1%oya in the first five months of this year—the
lowest reading since 1990.External supports probably limited
the slowing in overall growth last quarter—we project GDP
growth to have eased moderately to 6.6% ar in 2Q18—but
trade tensions may soon remove this support. Indeed, this
week’s regional PMI reports show China’sexport orders fall-
ingto the lowest level in twoyearsat the same time that
EMAX readings took a material step higher (Figure 4).
These developments should produce a China policy response
that is increasingly likely to be broad-based. On the monetary
policy front we expectthe PBOC to deliver two additional
50bp RRR cutsand relax loan quotas on banks. On fiscal pol-
icy, growth-supportivemeasures could include support for
infrastructure investment, VAT rebatesfor tariff-impacted
exporters increased from around 8% to a maximum of 16%;
andtax reductionsfor targeted companies (e.g., SMEs).
EM Asian CB tightening on the way…
While China is easing, rate normalization should gather steam
elsewhere in EM Asiathis quarter. Wehave hikes projected
for Taiwan, the Philippines, Thailand, and Korea. We don’t
expect India to move until next quarter but the risks of an Au-
gust move are rising.
The Bank of Korea meets next week but we are inclined to
see its next rate move coming in August. The May MPC
minutes tilted hawkish on a sanguine growth and inflation
outlook and heightened concern about the negative Korea-US
policy interest rate differential. Although the data since the
May meeting have been upbeat, uncertainties around the
BoK’s forecast have increased, reflecting heightened trade
policy tension and tighter financial conditions in EM trading
partners. Against this backdrop, we expect the BoK to leave
its base rate unchanged next week, but likely with a hawkish
signal that points to an August move.
At its June meeting, India’s MPC emphasized various domes-
tic and global uncertainties thatsuggestedit was in no rush to
hike in successive meetings. A number ofdevelopments since
then arepressuringit to reconsider this signal of a pause.
Since the June meeting, core CPImaintained upward momen-
tum, oil prices have remained high, and the rupee has contin-
ued to weaken. Perhaps most importantly, this week the gov-
ernment followed through on its budgetary promise to hike
agricultural support prices in a pre-election year. While this
was in line with our expectations, the MPC hasonly cited this
as an upsideinflation risk. This, together with an expected
acceleration in next week’s June CPI report, is likely to push
up the RBI’s 1Q19 inflation forecast further above 5% and
-2
-113
201420152016201720182019
Std. dev from 2010-forward average. PMI is 2012-forward
Figure 3: Manufacturing output and capex, expectations
Source: J.P. Morgan
German
capex
plans
(IFO)
US capex plans
(Fed surveys)
Global PMI future
output
47
49
51
53
55
2016201720182019
DI, sa. EMAX is EM Asia ex China and India
Figure 4: EM new export orders PMI
Source: J.P. Morgan
EMAX
EMEA EM
ChinaEconomic Research
Global Data Watch
July 6, 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
significantly increases the odds of the rate hike being brought
forward to August.
…along with hikes in Turkey
Turkey is also under pressure to raise rates as the June CPI
revealed clear upward pressure on prices. Wehaverevised
our year-end inflation forecast to 13.2% from 11.8% and now
expect the CBRT to hike rates by125bp in July. Growth mo-
mentum is already faltering and further monetary tightening
and weaker sentiment will translate into even slower growth.
Thisweek we lower our GDP growth forecast for this year to
3.7% and next year to 2.8%,assuming a prudent government
isformed and the CBRT keepsits policies tight for some
time.
Brexit: Cards on the table
Next week, the UK will publish proposals for its future rela-
tionship with the EU that flesh out its ideas for the “Backstop”
to ensure a hard border in Ireland is prevented. At the time of
writing, their content is not clear. But the proposals are re-
ported to see the UK commit to align with single marketregu-
lations in the goods sector, follow ECJ jurisprudence on the
interpretation of those rules, and collect tariffs on behalf of
the EU. After the transition period ends, the UK would remain
in a customs union with the EU until such time as the systems
toimplement a dual tariff regime with a soft Irish border are
in place. The immediate question is whether PM May can
withstand the political backlash from those in the UK who see
this as a denial of the “clean” Brexit they sought. Our best
guess is that shewill. The next question is whether the pro-
posal convinces “soft” Brexit Conservatives that they should
not impose a permanent Customs Union with the EU as a UK
negotiating objective. That issue will see votes in the Com-
mons on July 16/17. How the EU reacts to the proposals will
also influence that vote. We expect the EU will not take long
to state that it does not see the proposals as respecting the
integrity of the single market or able to convincingly deliver a
solution to the Irish issue. At this stage,the Commons cus-
toms union vote looks too close to call.
Oil production boosted GCC growth
With US sanctions looming over Iran and conflict disrupting
oil supply in Libya, we expect the GCC and Iraq to be the
main beneficiariesofthe recent OPEC+ decisionto raise oil
output. Accordingly, we have raised our 2018 GCC GDP
growth forecast to 2.8% from 2.2%. Another consequence of
higher oil prices and production is a faster-than-expected im-
provement in external and fiscal balances. As the top oil pro-
ducer, Saudi Arabia stands to benefit the most in the region.
After previously assuming almost flat hydrocarbon output this
year, we now