2Economic Research Global Data Watch October 5, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan Notwithstanding this positive news, the message from ourtop-down indicators is that global momentum continues tosoften. Our global PMI fell in September, led by a large dropin manufacturing. Both it and our broader nowcaster trackcurrent-quarter GDP at 2.9%, below our 3.1% forecast (re- vised down from 3.2% this week). Downside risk to current- quarter global growth also is linked to an expected drag fromrising oil prices. The current level of crude should push CPIinflation higher this quarter, generating an annualized pur- chasing power drag of more than 1%-pt (Figure 3). Although current-quarter growth risks are skewed to thedownside, we draw comfort from our belief that the negativetail risk associated with a US war on global trade has beenreduced. To be sure, our baseline now assumes the US willimpose an additional 25%-pt tariff on all goods imports fromChina by the end of 1Q19 (see “Dispatches from the war ontrade,” October 3). This represents a significant escalation ofthe bilateral trade conflict. However, our biggest concern hasbeen that the US would launch a war on global trade, engag- ing in sustained battles with key tradingpartners and imple- menting a worldwide tariff on auto imports. This developmentcould undermine business confidence and the prices of riskierfinancial assets, seriously disrupting the global expansion.Recent developments diminish the chances that such a globaltrade war will happen. The US reached a deal with Canadaover the weekend to renew NAFTA, with both Canada andMexico receiving protections from any future US auto tariffs.Meanwhile, constructive talks are under way with the EU andJapan with the US promising not to impose auto tariffs whilethey proceed. Seeking signs of policy traction in China This discussion highlights the importance of stabilization inChinese growth for the 2019 global outlook. Although broadpolicy supports are being put in place, it is unlikely that up- coming September releases will send a clear-cut message thatgrowth has bottomed. Next week’s trade report is likely toshow that export growth is still slowing and the broader datadump due the following week is expected to show a still- sluggish 0.4% monthly gain in IP. The one positive signal weare looking for in September is the end of a downdraft in in- frastructure spending.In a related development, we lowered our Taiwan GDP fore- cast this week on the back of a sharp September drop in thePMI export orders. Although a tech upturn related to a mobiledevice product cycle is lifting industrial activity in Taiwan, itappears that the impact of escalating US-China trade tensionsis starting to be transmitted across the regional supply chain. Italy’s risky budget gambit This week the Italian government confirmed plans to pursuean expansionary fiscal policy. The government plans fiscaleasing worth 0.8%-pts of GDP in 2019 that would raise thedeficit to an estimated 2.4% of GDP. GDP growth is expectedto rise to a 1.5% average per annum over the next three years(up from 1.1% this year) even though the plan relies mostlyon short-term pump priming rather than supply-side reforms.Indeed, the fiscal stance turns neutral in 2020 and 2021 whenthe deficit recedes to 2.1% and 1.8% of GDP.Table 1: Italian government, macro and fiscal projections RealGDPDeficit Primarybalance Governmentdebt Structuralbalance Fiscalthrust NominalGDP %oya% of GDP% of GDP% of GDP% of GDP% ofGDP%oya 20171.6-2.01.8131.2-1.10.22.2 20181.1-1.81.8130.9-0.9-0.12.4 20191.5-2.41.3130.0-1.70.83.1 20201.6-2.11.7128.1-1.70.03.5 20211.4-1.82.1126.7-1.70.03.1 Source: Italian Ministry of Finance In our view, this looks like a risky strategy. Conflict with theEuropean Commission is likely to intensify since the planviolates the fiscal compact. However, the more important con- flict may be with financial markets. The budget introducessizable new expenditures which will not be easily repealed byfuture governments, especially if growth does not increase ona sustained basis the way the government assumes. Thiswould worsen Italy’s medium-term fiscal position while fur- ther limiting the maneuvering room of future governments.Italian interest rates have jumped by about 150bp since May.Further increases could undermine the growth benefit entirely.This outcome, combined with the interest expense, wouldresult in even higher deficits. Thus, the key issue will bewhether the government can convince markets and its Euro- pean partners that the planned stimulus is truly a one-off event1 2 3 4 5 6 0 1 2 3 4 1112131415161718 Source: J.P. Morgan. Forecast assumes oil at $85/bbl Figure 3: Global CPI & retail sales volumes CPI (inverted) Retail sales %3m3m, saar; both scales (Aug is tracking for RS) 3Economic Research Global Data Watch October 5, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan and that it remains committed to medium-term fiscal consoli- dation and Euro area membership. Brexit: Fasten your seatbelts At the Salzburg Council meeting, the EU challenged the UKto come up with a new proposal for the Irish backstop by thetime of the October 18/19 Council meeting. If that challengeis met, the prize is an additional Council meeting for Novem- ber 17/18 designed to finalize agreement on the Withdrawaltreaty and Political declaration. With the UK political partyconferences behind us, time is short for the UK to deliver. The UK appears to have accepted that a soft border will re- quire Northern Ireland to align with a subset of EU regula- tions. And it seems likely to propose that the UK as a wholewould mirror the EU customs union until such time that sys- tems for Irish customs processing away from the border are inplace. However, the DUP is not on board with this proposal. Itis possible this dispute could be worked around by suggestingapproval from Northern Ireland’s political bodies for such anarrangement would only be sought when needed, at a laterdate. However, the UK would likely have to agree to a coun- try-wide alignment with both regulatory and customs unionsin the event that approval was not granted. The DUP-UK-EU discussion on Ireland is where the action isfor now, and we continue to think a UK-EU agreement inmid-November is more likely than not. But as the features of that agreement become clearer, it looks more likely to us that,at least on first attempt, the House of Commons will not sup- port it. The volatility that would ensue, combined with May’sability to ride out calls for a general election or second refer- endum, would likely ultimately persuade MPs to back theagreement on a second or later attempt. Brazil’s reform agenda on the line Brazil will hold its general election on Sunday October 7.Polls show the most extreme candidates are in front: Con- gressman Jair Bolsonaro from the tiny PSL party on the rightand Fernando Haddad from the Workers’ Party (PT) on theleft. The polls show Bolsonaro building a significant leadthough still short of the absolute majority needed to avoid arun-off on October 28. Markets have been cheered by Bolso- naro’s rise since he has espoused a free-market, reform agen- da, whereas Haddad is expected to roll back reforms launchedby the current administration. Even if Bolsonaro wins, he willface a significant challenge moving his agenda through afragmented Congress, including the critical social securityreform. Markets probably would respond poorly should thereform agenda come in doubt, pushing down the real, prompt- ing the central bank to initiate a tightening cycle. This scenar- io wouldalso result in lower economic growth and highersocial tensions. Our baseline assumes a positive outcome forthe reforms; however, we think this is a very close call.Turkey’s CPI sends shot across the bowAlthough policy responses by the CBRT and the governmenthelped to stabilize markets in the last few weeks, this week’sinflation data were a shot across the bow. The inflation rateleapt to 24.5%oya in September, far above expectations. The6.3% monthly jump in the CPI was the highest in almost 20years, second only to April 2001. Although inflation pressuresclearly have intensified, we think the September figures exag- gerate the problem. Having seen the slide in the currency,households have speeded up purchases in anticipation of priceincreases. Theresulting demand surge likely magnified theprice increases already planned by companies. We believe thisphenomenon will soon abate as labor market conditions sourand consumers turn more cautious. Indeed, the early indica- tions, including this week’s PMIand import data, point to asharp contraction in the economy. We currently expect athree-quarter recession and see the full-year 2019 GDPgrowth at just 0.2%. However, there is a growing risk of alonger and deeper recession. With domestic demand weaken- ing rapidly, FX pass-through will become the main source ofprice pressures. Hence, we think the CBRT will ride out theinflation storm, taking further action on rates only if the cur- rency weakens significantly further.RBI surprisingly holds, but tightensstance India’s central bank delivered a surprise by staying on hold attoday’s meeting, bucking widespread market expectations of a25bp rate hike. That said, the MPC changed its policy stancefrom “neutral” to “calibrated tightening,” suggesting the rate hiking cycle is not over. The RBI explained its decision byciting that inflation had undershot recent projections, mainlyon account of unusually benign food prices, and thereforemarked down its inflation forecast. Offsetting lower foodprices, however,is the fact that crude oil prices have in- creased 13% and the currency has weakened 7% since theAugust review, which should raise inflation in the comingmonths. To be sure, the RBI cited a host of inflation risks. Wecontinue to forecast inflation well above the RBI’s 4% medi- um-term target in the first half of 2019 once favorable baseeffects wear off, and therefore still expect 50bp of tighteningin this cycle. However, we have become more agnostic abouttiming because today’s action suggests the RBI will want theinflation risks to be realized in the data before it acts. Editor:Gabriel de Kock (1-212) 622-6718 gabriel.s.dekock@jpmorgan4 Economic Research Global economic outlook sum- mary October 5, 2018 JPMorgan Chase Bank NA David Hensley(1-212) 834-5516 david.hensley@jpmorgan Carlton Strong(1-212) 834-5612 carlton.m.strong@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan Global economic outlook summary Real GDPReal GDPConsumer prices % over a year ago% over previous period, saar % over a year ago 2017201820191Q182Q183Q184Q181Q192Q194Q172Q184Q182Q19 United States2.22.82.32.24.23.02.52.32.02.12.62.6↑2.6↑ Canada3.02.2↑2.2↑1.42.92.52.5↑2.3↑1.91.82.32.32.1 Latin America1.71.2↓2.1↓2.6↑-1.30.7↓0.9↓2.7↓3.43.93.54.3↑4.1↑ Argentina2.9-2.7↓-0.8↓4.7↑-15.2-9.0-10.0↓4.05.023.527.044.3↑44.9↑ Brazil1.01.22.30.50.72.42.52.23.22.83.34.5↑4.3↑ Chile1.53.83.74.92.82.0↓3.0↑4.0↓4.22.02.23.14.1↑ Colombia1.82.93.43.62.34.53.03.53.54.13.23.43.3 Ecuador2.40.2↑-0.7↓-3.71.5-2.5↓0.8↑-1.5↓0.0↓-0.2-0.80.0↓0.3↓ Mexico2.02.02.44.0-0.62.02.52.52.76.64.64.6↑4.1 Peru2.54.03.86.05.41.03.04.53.81.60.92.42.4 Uruguay2.62.1↓1.9↓4.5↑0.60.8↓0.5↓3.0↑4.0↑6.37.5↑7.47.8 Venezuela-12.0-10.0…-2.00.01.02.0……170028250600000..Asia/Pacific5.15.04.65.05.24.54.84.54.81.92.02.42.8 Japan1.71.11.3-0.93.00.52.51.01.50.60.60.91.0 Australia2.23.22.54.73.52.02.02.82.61.92.11.71.4 New Zealand2.82.72.52.23.92.81.52.82.51.61.51.71.8 EM Asia6.26.05.66.55.85.65.65.55.82.22.32.83.4 China6.96.66.16.96.76.06.15.96.31.81.82.63.4 India6.77.37.37.37.67.17.06.87.44.64.84.75.2 Ex China/India4.03.93.75.02.73.93.43.83.81.92.12.32.2↓ Hong Kong3.83.73.38.7-0.83.02.55.54.01.62.12.62.8 Indonesia5.15.15.26.14.84.74.75.35.33.53.33.53.0 Korea3.12.82.74.12.43.62.42.72.71.51.51.92.1 Malaysia5.94.74.35.61.14.04.04.84.83.51.30.61.0 Philippines6.76.56.95.95.38.07.56.07.03.04.85.34.0 Singapore3.63.02.62.20.62.82.82.82.80.50.31.81.6 Taiwan2.92.72.1↓1.31.62.42.1↓2.1↓2.2↓0.41.71.51.6↓ Thailand3.94.73.78.54.13.23.73.44.00.91.31.11.5Western Europe2.42.02.11.41.61.82.42.22.11.71.82.32.0 Euro area2.52.12.21.61.51.82.52.32.31.41.72.21.9 Germany2.51.92.31.51.81.03.32.32.31.71.32.32.2 France2.31.71.90.70.62.32.02.02.00.91.52.51.9 Italy1.61.11.31.10.60.51.51.51.51.31.31.91.6 Spain3.12.72.32.82.42.52.52.32.31.81.82.31.8 Norway2.42.32.11.42.22.32.32.12.11.32.43.52.9 Sweden2.42.62.12.23.12.32.32.02.01.81.92.52.5 United Kingdom1.71.31.80.41.62.02.31.81.53.02.42.52.5 EMEA EM3.82.71.93.63.1-0.51.1↓0.8↓2.74.54.67.5↑8.1↑ Czech Republic4.53.0↓3.4↓2.02.82.4↓2.2↓2.7↓2.7↓2.62.31.72.2 Hungary4.04.43.94.94.14.03.54.04.02.32.71.82.6 Israel3.43.63.4↓4.82.02.83.63.84.10.30.71.2↑1.3↑ Poland4.64.94.06.64.13.83.83.83.82.31.71.62.3 Romania6.93.52.80.65.83.22.42.42.83.15.33.93.1 Russia1.51.7↑1.42.83.20.3↑1.30.3↓2.0↑2.62.53.84.9 South Africa1.30.71.3-2.6-0.72.83.6-1.00.94.74.55.05.8 Turkey7.43.30.26.33.8-9.6-3.9-2.03.312.312.825.1↑24.7↑ Global3.43.33.13.13.52.93.1↓3.03.22.22.42.82.9↑ Developed markets2.32.32.11.63.02.22.5↑2.12.01.82.12.3↑2.2↑ Emerging markets5.14.84.55.44.23.94.1↓4.3↓5.02.82.83.7↑4.2↑ Global —PPP weighted4.03.83.63.83.93.53.73.53.8↑2.52.63.2↑3.4↑ Note: For some emerging economies seasonally adjusted GDP data are estimated by J.P. Morgan.Bold denotes changes from last edition of Global Data Watch, with arrows show- ing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts.Unless noted, concurrent nominal GDP weights calculated with current FX rates are used incomputing our global and regional aggregates.RegionalCPI aggregatesexcludeArgentina, Ecuador and Venezuela.Regional GDP aggregates exclude Venezuela. Forecasts forArgentina are based on JPMorgan’s estimates of CPI.Source: J.P. Morgan 。。。。。。