2Economic Research Global Data Watch November 9, 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 US rotations amid cooling finaldemand.WhileUS con- sumptionaccelerated to a 3.8% ar in themiddle two quar- ters of the year, equipment spending gains moderated to a2.5% ar. As the overall economy slows toward a projected2.5% pace this quarter we expect these developments to re- verse. Consumption growth should moderate as the recentdecline in household saving rates fades alongside risingin- terest rates and a diminishing fiscal boost. At the sametime, strong profit gains and elevated business confidencepoint to a modest rebound in capex gains.As we track these expected rotations across countries, it isimportant to confirm that they arrest the broader downwardmomentum evident in recent top-down indicators. Overall, welook for global GDP to expand at a 3% pace in 4Q18, even asour nowcaster has shifted down to a 2.7% tracking estimate.The growth rebound in Europe and Japan should provide amajor boost to global industry, which we expect to realignwith GDP growth. We also look for this year’s deceleration inglobal capex (ex. China) to end as growth stabilizes around 5%. US-China trade risk remains a wild card The major wild card for the outlook relates to US-China traderelations. Our global economic forecast assumes the US willimpose an additional 25% tariff on virtually all goods importsfrom China by 1Q19. This reflects a view that the evolution inUS demands—from lowering the bilateral deficit to alteringkey aspects of China’s growth model—will make it hard toreach compromise anytime soon. The prospective intensifica- tion of the conflict poses two downside risks to the outlook.The first is the significant drag on China as corporate marginsare squeezed and investment decisions altered. We’ve as- sumed a broad-based policy response will offset much of thedrag from the tariffs, keeping the China and global expansionon track. However, we recognize that the risks to this call lieto the downside as China stimulus may prove too slow or toosmall to stabilize growth near 6%, as we assume.The second risk is the potential for rising trade tensions toweigh on global business sentiment. Our survey-basedmeasures of business confidence have remained elevated butbusiness expectations have slipped recently, suggesting wemay be underestimating the drag that would ensue from afurther intensification of the trade conflict between theworld’s two biggest economies.There is also the upside risk that tensions abate. By all ac- counts, Presidents Trump and Xi engaged in a constructivephone call last week ahead of their December 1 meeting. Pres- ident Trump subsequently instructed US officials to draftterms for negotiation. However, we have no further infor- mation about why he did so or what these terms might entail.In our view, the most likely positive surprise would be a“cease-fire” in which the US agrees to suspend any additionaltariffs as long as it thinks China is negotiating in good faith.OPEC to begin curbing outputThe price of Brent crude oil has plunged nearly 20% sincehitting a four-year peak on October 3. Our forecast had calledfor the price to hold near the early October level on the backof US sanctions on Iran. It appears that the main driver of theprice drop is more generous supply. Output from the US,Saudi Arabia, and Russia has increased while the US unex- pectedly granted temporary waivers to numerous buyers ofIranian oil, giving them more time to transition to alternativesources. However, with the oil price now breaking below$70/bbl, we look for OPEC to scale back production ahead ofthe December 6-7 OPEC meeting in Vienna, with Russia fol- lowing suit. They could push for an oil output ceiling if the oilglut is still in place at the time of the meeting.Lowering the Italian growth forecast We revised down our growth forecast for Italy this week. Weexpect the new government’s policies will backfire, producinga sustained tightening in financial and bank lending condi- tionsand a loss of confidence that overwhelms any boostfrom fiscal easing. Indeed, GDP growth stalled in 3Q whilethe all-industry output PMI plunged 3pts to a five-year low of49.3 in October (Figure 2). We think that as conflict withBrussels persists, albeit at a low intensity, the drags fromweaker confidence and tighter financial conditions will grow.Between now and the end of next year, we now expect Italiangrowth to average 0.75% ar, compared to our previous fore- cast of 1.5%. This growth shortfall also has implications forthe budget deficit, for which we forecast an overshoot of the2.4% of GDP figure the government projects. For the Euroarea as a whole, our growth forecast for 2019 falls to 1.9%(4Q/4Q) from 2.1%.48 50 52 54 56 58 60 Jan 17Jul 17Jan 18Jul 18 DI, sa Figure 2: All-industry output PMI Source: J.P. Morgan Italy Spain France Germany 3Economic Research Global Data Watch November 9, 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 November 13th is the deadline for the Italian government topresent a new draft of its 2019 budget to Brussels. A failure toamend the budget means that the Commission could initiatean excessive deficit procedure (EDP), leading to closer scruti- ny of Italian fiscal policy and the ultimate sanction of penal- ties up to 0.5% of GDP. In the event, we believe the Italiangovernment will offer a one-quarter delay to its flagshipmeasures (universal income and lower retirement age). Thiswould be only a cosmetic change and we anticipate that theCommission will initiate an EDP.Brexit battle lines are being drawnAs negotiators in Brussels hammer out agreement between theUK and EU, the battle lines around its passage through theUK House of Commons are being drawn. The DUP are warn- ing that any provision that treats Northern Ireland differentlyfrom the UK as a whole is unacceptable. Brexiteers are warn- ing that they will not accept a deal that commits to the finan- cial settlement without a guarantee of a future trade deal, andargue that rejectionof the deal will prompt the EU to make abetter offer. We think the Commons is likely to vote againstthe deal on its first attempt. Failure of a motion supporting theEU withdrawal agreement will generate speculation of a “nodeal” exit, a Conservative leadership change, and a generalelection. In our view, none of these is likely, with passage ofthe EU withdrawal agreement on a second or later attempt,probably by mid-January, the most likely outcome. India: Pushing back rate hikes to 2H19 The macroeconomic environment in India has changed mean- ingfully since the last RBI review in October. Near-term infla- tion risks have abated with the fall in crude prices, the rupeestabilizing, and food prices remaining in check despite in- creases in government agricultural support prices. Conse- quently, inflation is on course to undershoot the RBI’s fore- cast from the last review and the MPC likely will go into theDecember meeting with three successive inflation prints be- low its 4% medium-term target. Separately, GDP growth risksare skewed to the downside as financial conditions tighten inIndia’s shadow banking system, which had partially offset thedeleveraging that banks are undergoing. For all these reasons,we take out the 25bp hikes previously projected for 4Q18 and1Q19. However, we still expect tightening in 2H19 amid con- tinued Fed hikes under our baseline view that the economyexperiences a strong cyclical recovery once the uncertainty ofthe general election in May 2019 is past. Antipodean central banks a bit less dovish The Antipodean central banks lie at the dovish extreme of theDM. While this remains true following this week’s meetings,each B