Economic Perspectives June 2018
Highlights
- Macroeconomic developments in advanced economies have shown different paths in recent weeks. Data for the US indicate a recovery in Q2 after the soft patch in Q1. This is supported by a rise in corporate sentiment, a positive impact of fiscal policies and strong labour market performance. Therefore, we upgraded our US growth forecast for 2018 from 2.6% to 2.8%.
- Meanwhile, recent data for the euro area were somewhat disappointing. Amid heightened concerns about political instability in some euro area economies and darkening clouds on the international trade front, this signals that the pace of euro area GDP growth might moderate through 2018. This is in line with last month’s downward revision of our EMU growth forecasts.
- Market fuss about the Italian mini-crisis has faded in recent weeks, but some ‘damage’ still remains. Italian rates are still elevated while German rates remain relatively subdued. Immediate crisis risks no longer loom, but longer-term risks remain substantial. It is likely that the current coalition will not address Italy’s fundamental economic problems, and as such a slowdown in reforms combined with fiscal expansion is the most likely scenario. Moreover, when the ECB begins normalising its monetary policy, underlying concerns about public debt sustainability in the euro area as a whole will become a more important market theme again.
- Risks of a full-blown trade war have increased in recent weeks. The trade conflict is escalating as threats have turned to action now that president Trump has decided to lift the exemptions on steel and aluminium import tariffs for the main trading partners of the US. Going forward, the extent to which other countries will retaliate and whether this will lead to a protectionist spiral will be crucially important to the growth outlook. For Europe in particular, potential tariffs on US car imports are the main risk.
- Inflationary pressures in the euro area are slowly building. Headline inflation jumped up to 1.9% in May. This was mainly due to temporary volatile factors like upward pressures from energy and food prices. Nevertheless, it presented a window of opportunity for the ECB to change its forward guidance about the Asset Purchase Programmes (APP).
- After September 2018, the ECB will taper its purchases dropping the monthly purchase amount to EUR 15 billion from EUR 30 billion at present. The ECB also signalled its intention to end the APP in December 2018. However, to ensure that markets do not anticipate an early or aggressive move to higher interest rates, the ECB indicated that policy rates are not likely to rise at least through the summer of 2019. This is broadly in line with our scenario. The first step towards a policy rate normalisation will only be taken well after the end of the APP, i.e. at the earliest during H2 2019.
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