Economic and Strategy Viewpoint
Economic and Strategy Viewpoint - October 2018
The trade war between the US and China has escalated, and we expect the dispute to drag out. We assess the impact for the global economy.
Will trade wars end the cycle?
– The trade wars between the US and China have escalated with another round of tariffs from both sides. We expect the dispute to be prolonged with all trade between the two nations being subject to tariffs by the end of next year.
– The impact on global activity is negative, but the dispute would have to escalate beyond China and the US to end the cycle. Nonetheless, when combined with the impact of tighter monetary policy and a fading in fiscal stimulus the effect of the clash on trade and investment will contribute to a slowdown in 2019 and potential end to the US expansion in 2020.
Italy: Bond vigilantes at the gates
– Italy's huge public debt mountain has been a concern for investors for some time, but the threat of a fiscal splurge by the new populist coalition government has caused investors to take fright, pushing yields up sharply. The coalition has just unveiled its 2019 budget, and while there is some loosening, it is far more constrained than previously feared. We expect investors to flock back to Italy in the near term.
– In the long term, we are still concerned over the sustainability of Italy's public finances. Poor demographics, a lack of investment and weak productivity growth are likely to cause the economy to stagnate for decades to come. Debt will probably become an issue, and with Italy stuck in a monetary union, Italy lacks the ability to devalue its currency or to manipulate its bonds yields. The bond vigilantes may not be knocking at the door, but they are certainly at the gates.
Japan: Hidden slack unlikely to halt Bank of Japan stimulus withdrawal
– Recent wage data provides some evidence of building wage pressures consistent with the very low unemployment rate.
– Female participation is a significant source of hidden slack in the economy, acting to dampen wage growth. This is a long term factor that should help to keep a lid on wages, although cyclical wage increases could occur in the shorter run.
– Becoming more relaxed about the 2% inflation target and concerned about the side-effects of ultra loose monetary policy, the BoJ will likely gradually withdraw stimulus despite limited progress on inflation.
Views at a glance
– A short summary of our main macro views and where we see the risks to the world economy.