2Economic Research Global Data Watch August 24, 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 experience shows that a gap of this type has consistent- ly signaled that Euro area growth will be revised higher.Still it is important to confirm that the Euro area is a com- plementary engine to the US with demand growing close toour projected 2.4% pace. This week’s August flash PMIprovides some comfort on this front as downward momen- tum appears to have been arrested with the survey stablesince March at a level consistent with 2.2% growth. Is high-tech picking up in Asia Tech activity should accel- erate across Asia between now and year-end, aligned withexpectations for a firming in global capex and a positiveimpulse from the smartphone cycle. The July data suggestthis upturn is starting to take hold. US core capital goodsshipments, an important component of our global capexproxy, advanced strongly in July, as did orders. In EMAsia, Taiwan’s high-tech export orders jumped 7.6%m/m,accompanied by a solid gain in tech production. Singa- pore’s tech output also took off last month. The impressiveupswing in Korea’s semiconductor exports, a ubiquitousinput into manufactured goods, sends a similar message(Figure 2). Is EM local currency credit supporting growth We expectrising dollar interest rates and a less favorable backdrop forcapital flows to stem the rapid growth of EM foreign cur- rency borrowing. However, the key swing factor in thecredit cycle in the EM ex. China (EMX) over the past twoyears has been the turnaround in local bank credit. The2016-18recovery in global growth and commodity pricescombined with a fall in EM policy rates prompted stabiliza- tion in lending standards and pickup in demand for creditthat turned the tide on EMX bank lending growth. Althoughthis week’s 3Q18 IIF EM bank lending survey pointed to afurther rise in credit demand growth, the broad-based tight- ening in credit standards raised concerns (Figure 3). In Chi- na, we do not expect policy stimulus to accelerate overallcredit in the coming months, but we do expect the growthof bank lending to pick up and support infrastructure pro- jects at the same time that the growth of non-bank creditremains weak. Fed signals continued gradual rate hikes This week’s Fed communications left us comfortable with ourcall that the FOMC will continue to hike 25bp per quarterthrough next year. The latest meeting minutes signaled both astrong inclination to tighten “soon,” i.e., at the Septembermeeting, and that “further gradual increases in the target rangefor the federal funds rate would be consistent with a sustainedexpansion.” Chair Powell’s Jackson Hole speech reinforcedthis message. The theme was risk management in monetarypolicy when variables like the natural rate of unemploymentare unobserved and unknown. Notably, while Powell said thatthe limited risk of overheating gives the Fed the latitude tocontinue to normalize at a measured pace, “risk managementsuggests looking beyond inflation for signsof excesses,” es- pecially in the financial markets. In addition, Powell citedrecent Fed research that argues against waitingfor more infla- tion pressures before hiking further when the unemploymentrate is so low. Brexit vote has weakened UK supply-sideWeak supply-side performance has been a hallmark of thisexpansion. In the UK, the Brexit vote has been an added fac- tor. The UK’s vote to leave the EU created a clear drag ondomestic demand last year as inflation reduced purchasingpower and uncertainty restrained business spending. Whilethis demand drag is now fading, the imprint on the economy’ssupply side looks like it is being sustained. The latest statisticsshow annual net immigration from the EU fell further from101k to 87k in 1Q18, with the total slowing since the referen- dum equivalent to 0.3%-pt of annual labor force growth(Fig- ure 4). Along with the drag on productivity from weak in- vestment growth, this reinforces our belief that the Brexit votehas reduced trend growth by around 0.5%-pt to1.0%-1.5%.We continue to anticipateGDPgrowth running above thistrend with the BoE resuming policy tightening next year. -10 0 10 20 20122013201420152016201720182019 Figure 3: EM bank lending standards* Above zero indicates tighter credit standards. Source: IIF, J.P. Morgan Net % balance * EM Asia EMEA EMLatam 0.0 0.1 0.2 0.3 0.4 0.5 07080910111213141516171819 % of labor supply Figure 4: UK long-term net immigration of EU citizens for work reasons Source: ONS, J.P. Morgan Brexit vote 3Economic Research Global Data Watch August 24, 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 China moves to stabilize yuan China announced further measures to stabilize CNY, reintro- ducingthe countercyclical adjustment (CCA) factor in theCNY daily fixing mechanism. This is the second policymeasure taken after the reintroduction of the 20% reserverequirements on FX forward transactions on August 3, a shiftfrom the “no-intervention” policy in earlier months. FurtherCNY depreciation runs the risk of fueling capital outflows andan adverse reaction from the US with regard to trade competi- tiveness. Overall, the policy baton is clearly shifting awayfrom FX and credit to fiscal policy, particularly infrastructurespending. Weexpect that the CNY will stay relatively stablefor the rest of the year, in both TWI and in USD/CNY terms.Turkey: Waiting on a policy program Having bought some time with short-term measures, the Turk- ish government is formulating a medium-term plan thatit isexpected to announce over the next two to threeweeks. Thecentral bank will meet within this same timeframe on Sep- tember 13. It also will be important to see how much difficul- ty Turkish companies face with their external financing needs,especially in October when at least US$13 billion is comingdue. Regardless, we think the combination of increased uncer- tainty, tighter financial conditions, higher inflation, and morerestrictive policies isset to push the economy intorecession.This week we slashed our near-term forecast to show GDPdeclining for three straight quarters from 3Q18 through 1Q19.In the new projections, GDP declines 0.2% in 2018 (4Q/4Q)followed by a 4.5% gain in 2019. We also revised up our end- 2018 inflation forecast to 17.3% from 14.5%. Despite the ex- pected slowdown in economic activity, we believe the CBRTstill needs to tighten policy to rebuild credibility; we expect afinal 250bp hike (up from the 125bp we originally expected)atthe September MPC meeting. Finally, due to improvedprice competitiveness and weaker domestic demand, we seethe CAD narrowing to US$51 billion (6.7% of GDP) at theend of this year and further to US$26 billion (3.9% of GDP)at the end of 2019. Given the large financing needs, if thepolicy response is inappropriate, risks to the growth outlookare significantly to the downside.Venezuela's massive deval comes up short This week Venezuela’s government announced a series ofmeasures to address the hyperinflationary spiral (July’s infla- tion was unofficially over 80,000%). While the recognition ofpast policy errors and acknowledgement of market forcesmarked a step forward for the Maduro administration, theoverall package lacks coherence and credibility, making itschance of success slender at best, inour view, in the contextof acute external constraintsfrom sanctions and falling oiloutput.The announced measures slash five zeros from a currency thatwas devalued by 96% to a level (fleetingly) consistent withthe prevailing black market exchange rate, and henceforth tiedto a dollar-denominated nominal anchor linked to the price ofoil. In addition, Maduro pledged to balance the budget in or- der to eliminate the