2Economic Research Global Data Watch July 20, 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 Looking through the volatility, we remain comfortable withour view that goods prices will firm in 2H18, alongside therebound in global industry now underway. The survey dataand input prices point inthis direction. Although rising tariffssupport this view, they are not likely to raise DM core infla- tion materially this year.With Japanese growth firming and labor markets continuingto tighten, Japanese core prices likely will rise in 2H18. How- ever, the risks to our forecast are skewed to the downside andinflation expectations could fall further as the BoJ looks set tolower its inflation forecasts again at its upcoming meetingwithout delivering a policy response. Pressure for action isbuilding andwe see a rising likelihood that forward guidancewill be used to link any change in its yield target to an infla- tion threshold.Global IP growth pickup getting traction The stage appears set for a 3Q pickup in manufacturing outputas final goods demand growth firmed last quarter. Euro areaIP picked up in May and this week’s June US and China re- ports provide more support for this view. Elsewhere in theEM, last quarter output suffered steep declines related tostrikes in Brazil that should be reversed. Atthe same time, IPgrowth is tracking a 7% ar gain in EMAX (EM Asia ex. Chi- na/India), which tends to lead the global cycle. Against thisbackdrop, the June declines in exports from Korea and Singa- pore and export orders from Taiwan strike a note of concern.The details of these reports point to weakness in high tech,which we expect to pick up in coming months as the next mo- bile device cycle kicks into higher gear.EMU and Japan: Offsetting2Q18 revisions The Euro area and Japan contributed to the global growthdisappointment at the start of the year, and it is encouraging tosee them rebounding. In the Euro area, the latest data showfactory output rebounding through May and we expect nextweek’s July flash PMI reading to remain unchanged at a levelconsistent with our call for 2.5% ar growth this quarter. How- ever, this lift is coming too late to align with our forecast for2Q18, which we lowered to a 2% ar this week. For Japan, thedisappointment was much deeper in 1Q—with an outrightcontraction in real GDP—but the rebound appears to bestronger. We raised our 2Q18 projection by 0.8%-pt to a ro- bust 2.8% ar gain in response to stronger business equipmentspending that more than offset softerconsumer spending. Onbalance, the Euro area and Japan look to have expanded 1.8%and 1.1% annualized in 1H18. Growth for both looks to havebeen much weaker than the 3.2% projected US pace, whichwas roughly 1%-pt stronger than we had anticipated at thestart of the year (Figure 2).The risk to all economies is escalating trade tensions. Fornow, business confidence remains resilient even as July read- ings roll in. This week’s Reuters Tankan survey shows Japa- nese business sentiment edging lower but still holding up atelevated levels through July, echoing the message from thelatest US surveys. Up next, we will be watching the “futureoutput” component of the flash PMIs for this month (from theUS, Euro area, and Japan), which showed the sharpest deteri- oration among sentiment readings last month. The Scylla and Charybdis of Chinese policy This week’s datashowed China real GDP decelerated modest- ly to a 6.7%q/q, saar pacelast quarter, in line with our fore- cast, while the June activity data pointed to a somewhatstronger-than-anticipated bounceback in both production anddemand growth at midyear. Manufacturing output firmed0.7% in June, setting up a solid trajectory heading into thecurrent quarter. On the demand side, retail sales rosea strong- than-expected 1.2% last month. Fixed asset investment accel- erated in June, importantly owing to a firming in manufactur- ing investment growth while infrastructure spending and realestate investment decelerated in the face of deleveraging inlocalgovernment financing.Despite the positive data, we continue to see downside risks togrowth in 2H18 stemming from the surprising pull-back inoverall credit growth year-to-date and the looming impact ofthe escalating trade disputewith the US. These two head- winds reveal a number of inherent policy conflicts. A keypolicy goal is to reduce the alarming degree of leverage thathas built up in China since the global financial crisis whileavoiding a hardlanding as growthgradually rotates towardless-capital-intensive demand sectors.At the same time, trade tensions are likely to weigh on theexport sector,though the recent currency decline, which has pushedthe CFETS basket down 5%over the past month, pro- vides a useful cushion (Figure 3).China faces the difficult0.5 1.0 1.5 2.0 2.5 3.0 3.5 JanFebMarAprMayJunJul %chg, saar Figure 2: Evolution of 1H18 GDP forecast Source: J.P. Morgan Japan EMU US 3Economic Research Global Data Watch July 20, 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 choice between stabilizing its currency and letting its export- ers absorb the hit from tariffs, or lettingits currency keep fall- ing sharply and risk a repeat of the 2015 debacle when deval- uationfears led to a rapid net capital outflow. Given the re- centdecline, policymakers are likely satisfied with the supportto exports and will turn to bolstering the floor under the cur- rency in the coming weeks. We lowered our CNY outlookthisweek, but still see the CFETS basket ending the year near itscurrent 93.5level. May threads Brexit needle in own house PM May has navigated a set of difficult votes in the House ofCommons this week (as well as a backlash from Brexiteers)with both her office and her White Paper plan intact. But thecost has been high, with Conservative party members unhap- py at the course Brexit is taking and opinion polls registeringbroader discontent. The focus now will shift to negotiations inBrussels, which will continue through August. The EU is in- tent on an all-weather Irish backstop to be included in theWithdrawal Treaty, while being prepared to allow a lot offlexibility in the non-binding political declaration on the fu- ture relationship that accompanies it. Although the UK hasaccepted the need for the Irish backstop, it has yet to proposean arrangement that is independent of the outcome of futuretrade negotiations, while rejecting the solution the EU hasproposed. Our best guess is that the UK ultimately will bendtoward a repackaged version of the EU proposal and be satis- fied with a declaration on the future relationship that commitsto nothing the UK has suggested. That bending is going to bepolitically painful however. A busy calendar for EM central banks Central banks in Indonesia (5.25%) and South Africa (6.50%)left rates on hold as expected. However, both banks main- tained a tightening bias. For BI, our call is unchanged and welook for two 25bp hikes in 2H18. For the SARB, we changedour call to pullforward a rate hike to January 2019. TheSARB’s communiqu put more emphasis on upside inflationrisk and less on downside growth risk than we anticipated. Inaddition, officials emphasized the 4.5% inflation target mid- pointrather than merely staying below the 6% ceiling. Head- line inflation was 4.6%oya in June while core inflation was4.2%. Though we think inflation will undershoot the SARB’sforecast, officials probably will be inclined to hike as the cur- rency comes under further pressure.Next week brings six additional policy meetings. The mar- ket’s focus will rightfully be on Turkey, as we do not expectaction anywhere else. Although the initial comments comingfrom the newly-appointed Finance Minister Albayrak (Presi- d