In August, we received both good and bad news. To start with the good news: US Federal Reserve cut interest rates in early August, as expected, and introduced additional tax incentives. China, which earlier this year launched a modest tax and fiscal stimulus is likely to provide additional incentives. Meanwhile, the European Central Bank (ECB) pledged additional monetary easing. Other global central banks also lowered interest rates.
Now for the bad news: a trade war between China and the United States turned to the worst phase. Trump administration has threatened to introduce a 10% loan participation rates for an additional $ 300 billion of Chinese imports, and China in response, banned imports of US agricultural products and devaluing its currency. The impact of these new measures is expected to be adverse, but not significant. However, if the conflict escalates, recession risks rise sharply.
Your attention the opinion of analysts on specific countries, regions, and market conditions.
United States: a new fiscal stimulus from the Law on bipartisan budget in 2019 will contribute to the growth
Congress passed and the President signed the Law of the bipartisan budget for 2019, abolishing the limit costs and suspending the debt ceiling. This law will lead to additional fiscal stimulus and strengthen growth in 2020 and 2021, respectively. Real GDP growth is projected at 2.3% compared to 2.9% during 2019 to 2018.
Europe: political events and economic indicators show that Europe is moving to the "Storm"
The growing likelihood Brexit «no deal" and the prospects for early elections in Italy and the UK have worsened conditions for business. Recent forecasts of real GDP growth for 2019 and 2020 amount to about 1% for the eurozone and the UK, while growth in 2020 is likely to be a little weaker, and can further be reduced. Germany remains the most vulnerable to further failures in external demand due to its relatively high ratio of exports to GDP. The Italian economy also has high export dependence, but continued political and fiscal tensions further restrains domestic demand.
Japan short-term surprises for growth
Japan's real GDP growth at 0.4% in the second quarter was stronger than expected. In this regard, the GDP forecast for 2019 has been raised from 0.7% to 1.1%. Scheduled in October 2019 increase in the consumption tax will increase costs temporarily in the third quarter of 2019. Risks to Japan are likely to worsen in the currency war; taking into account the status of the Japanese yen (safe haven), such a war is likely to lead to its rise in price, which further hurt growth.
China even more punch from tariffs
China's growth has slowed, and if the United States will impose a 10% loan participation rates for an additional $ 300 billion of goods from China, it is estimated IHS Markit, the direct impact will be a reduction of the real growth of China's GDP by about 0.2% in 2020 and 2021, respectively. However, China is projected partly compensates for adverse effects of new tariffs policy additional stimuli.
Other major emerging markets: in the US and Chinese authorities
Before the start of trade tensions slowdown in developed countries, and changes in the monetary policy impact on commodity prices, exports, currency and interest rates. Trade war intensified these trends by destroying the global supply chain by reducing commodity prices and bringing down exports. On the other hand, the decrease in the Fed interest rates and the expected stimulation of the ECB enable central banks in emerging markets to soften its monetary policy.
Commodities: concern about growth and rates
We see a disappointing increase in demand for the commodity markets in the first half of 2019, continued throughout 2019 and right up to 2020, as the trade dispute between China and the US continues to slow economic growth and demand for commodities. In addition, the markets warily watching the currency, in particular for the rate of the US dollar and the possibility of a currency war. This has led to lower prices for most commodities, with the exception of precious metals. IHS Markit expects oil prices to $ 66 per barrel in Q4 2019 and Q1 2020. However, in 2020 the average price for Brent will fall to $ 64 per barrel in 2020.
Monetary policy: the Fed issues more manageable than the task of the European Central Bank, Bank of England and the Bank of Japan
Fed's difficulties are well documented, though, compared to other developed countries, the growth rate in the United States are strong, the risk of a recession is quite low, and interest rates are at an acceptable level, in contrast to the euro zone and Japan. If the Fed is necessary to resume asset purchases, given the breadth and depth of capital markets in the US, it has far more features than the ECB or the Bank of Japan (BOJ), where the need for such purchases is more urgent. ECB and BOJ tool sets are more limited. In the case of the Bank of England (BOE), its hands are tied huge uncertainty associated with Brexit.
Currency markets: ironically, trade war strengthens the US dollar
A trade war between China and the United States makes the dollar even more. Let's start with the fact that the safe state of the US markets means that every time the growing tension, there is an increase in demand for assets in US dollars. The volume of US debt, which is owned by foreigners, have recently reached record levels. Plus the reduction of Chinese exports to the United States reduces the demand for the yuan and puts downward pressure on the currency. Finally, the trade war has a very negative impact on world trade and growth in some of the most open economies in the world, such as Germany.
Income and equity markets: among other things, the markets are concerned about a repetition of 2015 and 2016
Political risk of errors is enormous and the markets are very concerned, as evidenced by the recent significant fluctuations in global stock indices. The dispute between the US and China - is not the only source of anxiety in the market. Other concerns include the weakening of growth outside the United States, mixed earnings reports, uncertainty about what the Fed will do next, an inverted yield curve, and the political instability in Europe.
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