。Economic Research
Global Data Watch
January 11, 2019
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
moderation of geopolitical concerns to break the negative
feedback loop. Second, we look for corporations that have
generated robust profit gains over the past eight quarters to
take only limited steps to cut back spending and hiring in the
face of slower revenue growth. Against this backdrop, there is
a strong case for global consumption gains to accelerate this
quarter as declines in energy prices and global food price in-
flation boost household purchasing power (Figure 2). If we
are right, global growth should find its footing yet again and
extend the life of the expansion into a second decade.
Throwing in the towel on Japanese reflation
We are revising down our inflation forecasts substantially as
well. We now expect CPI inflation to slip to 2.1%oya in
2Q19, 0.5%-pt lower than the forecast in our 2019 outlook. In
large part, these broadly based revisions reflect evidence that
last year’s spike in food and energy price inflation is now
unwinding. However, there is also a shift taking hold in our
forecast for DM core inflation, which we have expected to
climb based on the maintenance of above-trend growth amid
historically tight labor markets. In the Euro area the adjust-
ment is modestly downward to 1.3%oya for 2019. While the
lack of upward momentum in recent core inflation prints
points to a slower acceleration, the firming in wages and con-
tinued tightening in labor markets points in the direction of a
rise ahead. Indeed, despite last year’s growth disappointment,
Euro area unemployment rate fell to a 10-year low of 7.9% in
November—0.8%-pt lower than 12 months ago.
The more significant shift in our core inflation forecast comes
in Japan (Figure 3). A year ago, we projected core inflation to
reach 1%oya at this juncture; instead, it remains near zero.
While various factors including the currency and global
commodity prices have held back Japanese inflation, the fun-
damental problem appears to be deeply-entrenched low infla-
tion expectations. Policy has played a role as the BoJ’s credi-
bility has eroded in the absence of action in response to large
and persistent inflation disappointments. The BoJ appears to
be constrained by its own institutional culture, political influ-
ences, and concerns about financial stability. Seeing little pro-
spect for a material change in these dynamics, this week we
revised down our inflation outlook and see core inflation re-
maining well below 1% through the end of 2020 (adjusting
for the upcoming VAT hike and policy shift to free educa-
tion). Although we don’t expect either the ECB or BoJ to act
anytime soon we have pushed back our projection of the tim-
ing of theirfirst steps in the direction of normalization (see
the research note “Japan: BoJ not likely to raise 10yr yield
target, even in 2020” in this GDW). The growing concern for
both central banks is that they will not have proceeded much
down the path of inflation and policy rate normalization when
the next global recession hits.
China announces more policy easing
Developments in theUS-China trade dispute continue to
move in a positive direction. This week’s initial round of talks
in Beijing was widely reported to have gone well, laying the
groundwork for Chinese Vice Premier Liu to meet with US
Trade Representative Lighthizer and Treasury Secretary
Mnuchin in Washington on January 30. China’s efforts on the
external front are being coupled with a raft of domestic steps
to contain a perceived loss of economic momentum at the turn
of the year. On the heels of last week’s credit-easing measures
(including a 100bp RRR cut), officials signaled further
measures this week, including tax cuts for SMEs, fiscal subsi-
dies for purchases of household durable goods including au-
tos, and plans to frontload infrastructure spending. While do-
mestic policy is easing broadly in line with our expectations,
the speed and magnitude aresomewhat more aggressive than
anticipated.
Euro area: Still looking for drags to fade
While we have materially lowered the Euro area growth fore-
cast this week, there is still acceleration built into the 1H19
forecast as we believe that recent performance has been de-
pressed by a number of forces that are likely to fade. In addi-
tion to diminishing French protests, German industry should
boost growth this quarter—its car production slumped 43% ar
in 3Q18 due to the new emissions-testing regime and recov-
ered only partially last quarter. However, motor vehicles or-
ders have returned to pre-summer levels suggesting the re-
bound is delayed but not canceled. In addition, German phar-
maceuticals output looks to have slumped at a 60% ar in
4Q18, dragging GDP down by 0.6%-pt ar. Remarkably, this
likely reflects misreporting, which the statistics office is in-
vestigating. In all, we have lowered our sights on underlying
growth to about 1.55 for this year after accounting for these
temporary lifts (Figure 4).
-3.5
-2.5
-1.5
-0.5
0.5
201420152016201720182019
Japan
US
EMU
%-pt chg in 4-quarter rolling forecast. JPM FRI
Figure 3: Core inflation revisions
Source: J.P. MorganEconomic Research
Global Data Watch
January 11, 2019
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
Brexit: Here comes the vote
The UK House of Commons is widely expected to reject the
proposed Withdrawal Agreement in Tuesday’s vote. Thereaf-
ter, it will be important to see whether a majority for a differ-
ent course of action begins to form. Our central case is that it
does not, affording May the opportunity to bring the deal back
to the Commons again after further discussions with the EU.
We think May’s best hope for the deal is that she is able to
attract enough support from Labour MPs to offset the dissent
within her own party, while the rising threat of a second refer-
endum serves to limit that dissent. The legislative timetable is
getting very tight if the statute book is to be ready for a March
2019 exit. The EU will agree a “technical extension” of that
deadline upon request by the UK if the political decision on
how to proceed has been made. But if the UK has not made
that decision, the EU will be reluctant to agree an extension at
anearly stage, or one of much length.
Macro uncertainty keeps EM CB’s patient
With the global economy on a slightly softer trajectory than
previously expected and with near-term inflation pressures
more down than up for headline and stubbornly muted core,
central banks around the world are shifting into a cautious
holding pattern. For the EM, the lead is coming from the Fed
but numerous other factors are at work. For largely open
economies, the downshift in global growth is providing the
most breathing room to central banks. For those heavily reli-
ant on external capital flows, the pause in Fed rate hikes is the
most important. The fall in commodity prices is having an
opposing impact on commodity importers and exporters.
Added to this mix are domestic political developments that
dominatecentral bank behavior. None of these factors are
mutually exclusive but their relative importance varies by
country.
In response to the slower pace of hikes from the Fed, we
reduced projected tightening across the more capi