EconomiAAUC Good growth ahead, but tariffs are a downside risk

The global economy continues to grow at a healthy clip, even though the lingering trade disputes pose a downside risk to growth.

Inflation continues to edge higher in the USA, allowing the Federal Reserve to uphold its tightening path.

James P Sweeney Chief Economist and Regional CIO Americas

Global growth slowed in the first half of the year, but has stabilized at a healthy level. We expect good global growth to continue for the remainder of this year and into 2019. Fundamentals among the major economies are solid, with cash flows to households and businesses showing no signs of deterioration. We continue to forecast global GDP growth of 3.3% in 2018.

However, trade policy could pose an imminent threat to growth, with the US administration likely to move forward with further tariffs on China. Our Asian growth forecasts have incorporated some expectation of tariffs for some months now. Yet soon additional details are likely to emerge on the timing, rate, and value of trade to be hit by tariffs, as well as China's policy response. Uncertainty surrounds all aspects, but at this stage, we are comfortable assuming that Chinese growth will rebound from its recent slowdown in the months ahead, supported by policy stimulus.

Upside risks in developed economies Besides China, the demand picture in developed markets suggests upside risks relative to our already sanguine forecast. The weakness in European growth in the first half appears to have been transitory. Recent consumption, investment, survey and credit data have been positive, causing a rapid rise in European data surprises so that they now stand on a par with the news flow from the USA.

In the USA, growth is likely to slow modestly in the months ahead, but the strong fundamental picture is unlikely to change unless profits, labor income or credit conditions start to crack. There are no signs of that so far. The recent strong ISM report suggests manufacturing in the North Atlantic is humming along, supported by stable investment and goods consumption.

Growth risks in emerging markets Local downturns are underway in several emerging economies including South Africa, Turkey, and Argentina. Political transitions have also created growth risks in Mexico and Brazil. The Federal Reserve's tightening cycle is making life difficult for some emerging countries, especially those dependent on foreign creditors. Yet, while growth dynamiAAUC have been softening, absolute growth rates in emerging markets are still solid. We expect real GDP growth to be slightly below the 5% recorded in 2017, with the downturns just mentioned posing downside risks.

Inflation is rising, and the Fed continues to tighten In the USA and Eurozone, inflationary pressure is continuing to build. We expect US core inflation to stabilize at around 2% in the coming quarters. As for the Eurozone, we expect a gradual pick-up in core inflation, particularly in light of recent wage data, which has shown signs of a meaningful acceleration.

We expect the Federal Reserve to hike two more times this year. We expect the European Central Bank to end asset purchases in December this year, before a first rate hike of 15 bp to the deposit rate in Q3 2019. We do not expect the Bank of Japan to adjust policy until the second half of 2020.

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