At the end of June, the major global economies met at the G-20 summit in Osaka, Japan. The big issue facing the global economy was, and still is, the trade dispute between the US and China. US President, Donald Trump, and China’s President, Xi Jinping, have reached an agreement to resume trade talks. Donald Trump has said that he would allow US companies to continue to trade with the Chinese tech company, Huawei. He also said that the US would not be adding tariffs on US$300 billion of Chinese imports. A full-scale trade war has been averted, therefore, the focus during July has been the economy and in particular the dovish stance on monetary policy.
US economic growth
The US economy is continuing to make progress, with Gross Domestic Product (GDP), in the first quarter 2019, being revised down by less than expected, from 3.2% to 3.1%. This revision is on the back of stronger consumption and exports than initially reported, which suggests the economic expansion is on a relatively firm footing, although any escalation of trade tensions between the US and China could reverse the positive economic trend. In June, US inflation, as measured by the Consumer Price Index (CPI), declined on an annualised basis to 1.6%, from 1.8% in the previous month. However, the core inflation rate, which excludes volatile items such food and energy, rose 2.1%, which is the highest level in a year and a half. Despite this increase, most economists believe it is unlikely to deter the Federal Reserve (Fed) from cutting interest rates at the next Federal Open Market Committee meeting, which will be held from 26 to 29 July.
Jerome Powell, the Fed Chairman, has also given his strongest hint yet that an interest rate cut may be on the cards, highlighting the uncertainty created by US-China trade tensions and the slower economic growth. Jerome Powell said the Fed stood ready to “act as appropriate”.
In the three months to May, UK GDP grew 0.3%, with the economy benefiting from an upturn in car production, however, the services sectors, particularly the financial services industry, saw a contraction.
On the positive, in the year to May, UK wage growth continued to be strong, rising 3.6%. Wages have now outpaced inflation since May 2018. In June, inflation as measured by the CPI, on an annual basis, rose 2%. In the 3 months to May, UK unemployment was 3.8%, which is the lowest level since 1992.
The big political development is the replacement of Theresa May as Prime Minister, with Boris Johnson. The appointment of Boris Johnson has increased the chances of a ‘no deal’ Brexit. In the short-term, this will maintain the economic uncertainty and this is likely to be reflected in the currency. Since the beginning of May, Sterling has weakened from US$1.32 to US$1.25 to the Pound. Sterling is likely to remain weak until there is some political and economic clarity.
In the Eurozone, the forecast for economic growth in 2019 remains unchanged, with GDP expected to grow at 1.2%; however, the forecast for 2020 has been lowered from 1.5% to 1.4%.
In June, inflation as measured by the CPI, on an annual basis rose 1.3%. This is significantly below the 2% inflation target and a sharp decline from the inflation figure in April 2019 of 1.7%. The drop in inflation and the lower growth forecast has put pressure on the European Central Bank (ECB) to stimulate the region’s struggling economy.
The ECB has taken a more dovish tone, with interest rate rises looking further away than they did 3 months ago. The ECB’s forward guidance now states that they expect interest rates not to be raised, at least through the first half of 2020, having previously been the end of 2019. The President of the ECB, Mario Draghi, has hinted that the ECB is preparing to increase economic stimulus, such as Quantitative Easing.
Mario Draghi’s successor
Christine Lagarde has resigned as Managing Director of the International Monetary Fund (IMF) and this follows her nomination as the President of the European Central Bank. In her role with the IMF, she coordinated the large financial bailout for Greece in conjunction with the ECB and European Union.
The existing President, Mario Draghi, has set out the current monetary policy, therefore, over the short to medium term, there is unlikely to be any significant change in policy.
China’s economic slowdown
In the second quarter of 2019, China’s GDP grew 6.2%, year on year. This is the slowest pace in the March to June period in 27 years and illustrates the impact the US-China trade tensions are having on the Chinese economy. However, resilient domestic consumption averted a deeper slowdown.
Political tensions with Iran
By seizing a British registered oil tanker in the Gulf, Iran has escalated the political tensions between Iran and the West. It is too early to say what the long-term outlook will be, but it has increased the economic risks. However, what historically has happened with tensions arising in the Middle East is an increase in the oil price, but so far this has not occurred, with the Brent oil price remaining at just above $60 per barrel.
The global economy is in the process of slowing down; however, the global economy and markets are being supported by the dovish monetary policy stance by the central banks, led by the Fed. The suppressed levels of inflation mean there should be no significant change in monetary policy, with interest rates remaining lower for longer. The risks to the global economy and markets remain the geopolitical risks, such as the US-China trade tensions, which could resurface at any time.