2Economic Research Global Data Watch July 13, 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 While it is premature to conclude that recent policy moves aredirected toward deglobalization, a number of actions point inthis direction. The US invoking national security as a justifi- cation for tariffs legitimizes a major loophole that promoteshigher trade barriers. At the same time, the failure of the USto support appointment of new trade judges could eventuallyparalyze the WTO. Taken together with the threats made toend NAFTA and the lack of clarity linking US tariff increasesto desired outcomes, there is a pattern of behavior suggestingwe may be entering a “war on trade” and globalization.We believe that the main downside risk to global growthcomes from a possible sentiment shock related to the threat ofa war on trade hitting global capex. Last week, we presentedthe toolbox of indicators we track to gauge whether this threatis altering business sentiment. At midyear there is only lim- ited evidence of a sentiment drag as global business confi- dence remains upbeat (Figure 2). This weekwe show howglobal business sentiment, linked to positive news on profits,has been an important driver of the recent global capex up- turn. Our baseline forecast incorporates a modest decline inconfidence inthe coming quarters. An additional one- standard-deviation shock to sentiment due to trade concerns— effectively reversing the rise over the past two years—wouldbe large enough to reduce spending gains by 3.5%-pts (Figure3). China facing headwinds on two fronts Our outlook for China anticipates rotation this year as a posi- tive external impulse cushions a credit-tightening drag ondomestic demand. China’s 2Q18 GDP report out next week(we expect a 6.6%q/q annualized gain) will likely reflect thismessage,reinforced by the key activity data for June. Wehave already seen that the trade surplus widened last monthand next week’s reports should show only a modest reboundin retail sales and fixed asset investment from recent weak- ness.However, two recent developments suggest that risks areskewed to the downside for our 2H18 outlook of 6.3% annual- ized GDP growth. First, trade tensions with the US are esca- lating with the announcement of 10% import tariffs on anadditional $200 billion worth of Chinese products. We esti- mate that these tariffs, along with countervailing measures,could reduce China’s exports to the US by 8.6%, with a directnegative impact on China’s GDP of 0.2%. There could also benegative repercussions through the indirect impact on the la- bormarket and consumption, as well as on business sentimentand investment.Second, credit is growing more slowly than the targeted 12%pace, with growth in the stock of total social financing dip- ping below 10%oya last month—the slowest pace in over 15years at least (Figure 4). While the slowing owes primarily tonon-bank lending, the hit to activity is likely of increasingconcern to policymakers. We consequently expect policy toturn more supportive. This includes attempts to partly offsetexternal drags (including a potential increase in export taxrebates and tax cuts for targeted companies, e.g., SMEs, andsectors) as well as easing broader fiscal and monetary policiesto support domestic demand (we look for two to three RRRcuts of 50bp in the next12 months and potentially some in- crease in supports for infrastructure spending).Japan consumer remains soft We project that real GDP in Japan rebounded last quarter aftercontracting in 1Q18. The latest data are mixed, posting upsiderisk from business equipment spending but downside risksfrom consumers. In April and May, core (domestic) machin- ery orders expanded at the fastest pace since 4Q13, whileFY2018 capex plans from the BoJ’s Tankan show spendingaccelerating around midyear despite downside risks from ele- vated trade frictions. However, consumer spending gains re- main anemic, despite very strong labor income growth.0 2 4 6 8 10 20142015201620172018 %oya. Model fit based on different sentiment inputs . Figure 3: Business equipment spending, global ex China Source: J.P. Morgan -1 std dev sentimentshock from baseline -0.5 std dev (baseline) Stable Actual 9 12 15 18 20142015201620172018 Source: J.P. Morgan %oya Figure 4: China total social financing Including local govt debt swap (Dashed also incl. shadow banking) Total social financing (dashed black is target growth) 3Economic Research Global Data Watch July 13, 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 This month’s record-breaking rain in western Japan willdampen consumer spending this quarter. Damage to overallgrowth should belimited, however, as the affected areas arenot industrial centers and reconstruction spending will boostactivity soon. The July Reuters Tankan and June trade dataout next week will help us fine-tune the outlook and gauge theimpact of trade frictions and weather disruptions. We alsolook for core CPI inflation to have moved up to 0.5%oya inJune, providing some comfort to the BoJ.Brexit: Resigned to volatility The UK’s proposed future trade relationship with the EU in- volves a common rule book on goodsand a dual tariff regimeallowing the UK the ability to set tariffs independently with- out introducing new customs procedures at the UK-EU bor- der. The incremental move toward alignment with EU ruleshas prompted two Cabinet resignations and a broader back- lash among Brexiteers. May appears likely to survive theseimmediate pressures, while the soft Brexit wing of her party isnot likely to succeed in imposing a new customs union on thePM in a vote in the Commons next week. The UK’s proposed relationship bears a passing resemblanceto the arrangement the EU has with Switzerland, which haslimited access to the EU services market and commits to alignwith EU regulations in the goods and agriculture sectorspared to the Swiss-EU deal, the UK proposal removescontributions to the EU budget, and free movement of labor.Beyond these sticking points the EU has made clear it has nointention of replicating anything close to the Swiss deal inpart as the EU routinely complains Switzerland does not im- plement EU regulations as faithfully as treaties require it to— an issue the UK proposal does not address. The EU likely will dismiss May’s proposal and press the UK tochoose between the two options it has already proposed: mem- bership of the single market and customs union, or a Canada- style FTA with special arrangements for Northern Ireland. TheCanada-style FTA will allow for tariff-free trade in goods andafford the UK control over labor movements. However, it wouldrequire customs controls and significantly limit services trade.Our best guess is that May will, eventually, turn toward this op- tion. Doing so will be politically painful and involve delicatediscussions with the DUP. The EU ultimately will need to assistwith tweaking and repackaging its proposal for Northern Ireland.But the EU does not regard the UK’s threat of a “no deal” Brexitas credible, and has control over the Brexit timeline via the abil- ity to agree an extension to the deadline. Getting to agreementwill be hard, and risks of the tail outcomes (no deal or no Brexit)have both risen. But we believe that, with much volatility alongthe way, a negotiated deal based on a future FTA is likely. Earlier and more hikes from RBI Although June inflationslightly undershot expectations, coreinflation continues to firm in India. Core-core prices (standardcore adjusted for housing) rose another 0.4% last month,pushing up core-core inflation to a three-year high of5.6%oya. This, in conjunction with the rupee continuing toweaken despite strong official interven