Overseas Headlines- August 21, 2018

Date: August 21, 2018 

United States:

U.S. Heads for Best Growth Since 2005 on Robust Domestic Demand

The U.S. economy looks set to forge ahead as fresh reservoirs of domestic demand carry it past turbulence overseas, keeping the Federal Reserve on course for further interest-rate hikes. Households have more cash to spend than thought, thanks to newly discovered pools of savings and President Donald Trump’s big tax cuts. Firms are ramping up production and rebuilding inventories after running them down by the most since 2009. And government spending finally looks set to swell, after Congress opened the floodgates in March with a $1.3 trillion package. The result, some economists say: Growth in the second half of 2018 could clock in at 3 percent or more. While that would be slower than the second quarter’s 4.1 percent pace, it would be enough to make the entire year’s performance the best since 2005, when gross domestic product climbed 3.5 percent. “It’s a green ‘go’” for the economy, said Allen Sinai, president of Decision Economics Inc. in New York, who sees GDP expanding 3.1 percent this year. The solid outlook should prompt Fed Chairman Jerome Powell and his colleagues to press ahead with plans to raise rates two more times this year in spite of criticism from Trump. The president told wealthy Republican donors at a fund-raiser on Friday that he had expected Powell, whom he nominated to replace Janet Yellen this year, to be a cheap-money chair but he’s instead tightened monetary policy. Powell is slated to speak Friday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Growth of 3 percent in 2018 should also be welcomed by the White House. It would be a down payment on the Trump administration’s controversial claim that business tax breaks, deregulation and more-favorable trade policies will lift expansion to that pace on a sustained basis. Caveats to the brighter outlook abound, however. Chief among them are the turmoil from Trump’s tariffs on imported metals and a variety of Chinese goods. U.S. stock-market investors have mostly shrugged off the tumult — share prices are near record highs — but that could change if Trump widens the trade battles to include automobiles, a key global industry. Many economists also question how long the good times can last, as borrowing costs head higher, while the boost from lower taxes and higher spending fades next year before disappearing in 2020.



U.K. Government Posts Biggest July Budget Surplus in 18 Years

The U.K. budget surplus in July surged to the biggest since 2000 for the month as tax receipts picked up. The surplus on the month was 2 billion pounds, more than the 1.1 billion pounds predicted by economists, the Office for National Statistics said on Tuesday. The April-July deficit for the financial year so far was 12.8 billion pounds, down more than 8 billion pounds from last year. The deficit in 2018-19 so far is running more than a third below year-earlier levels, as the government coffers benefit from record employment and reasonable consumer spending. July often produces a budget surplus, as self-employed workers’ tax payments from the previous financial year are due. The July surplus leaves Chancellor of the Exchequer Philip Hammond on course to significantly undershoot the 37.1 billion pounds, or 1.8 percent of GDP, forecast by his fiscal watchdog for the full fiscal year. Almost a decade of austerity has reduced borrowing in the aftermath of crisis and Hammond wants to balance the books by middle of the next decade. The cash measure used to calculate how much the Treasury needs to borrow came in at minus 13.8 billion pounds last month.


U.K. Manufacturing Growth Resilient on Pound Weakness, CBI Says

U.K. manufacturing continues to benefit from the weaker pound, the Confederation of British Industry said in a report published on Tuesday. While overall growth eased slightly in August, output and orders expanded at a pace above the long-term average. Exporters, aided by the currency’s depreciation since the Brexit vote, are doing especially well. Export orders “remained strong,” the CBI said. Manufacturing expanded in 13 sectors out of 17, with food, drink and tobacco giving the biggest boost to growth. Industry expectations of output prices for the next three months rose. While price prospects are “comfortably below” January’s peak, they remain historically high, the CBI said. Bank of England policy makers decided to unanimously to raise the benchmark interest rate to 0.75 percent at the beginning of August. The central bank estimates that the economy is growing fast enough to generate inflation pressures and that a series of limited and gradual rate hikes will be needed to keep prices in check.



China Reiterates It Won’t Use Yuan Rate as Tool in Trade War

China won’t use competitive currency devaluation or the foreign exchange rate as a tool to cope with trade frictions, according to a senior central bank official. “The yuan’s exchange rate is decided by the market,” Li Bo, director of the People’s Bank of China’s monetary policy department, said at a press conference in Beijing. He said the currency has more flexibility this year and the central bank is confident of keeping the rate “basically stable at a reasonable equilibrium level.” Li said the PBOC has taken measures to prevent pro-cyclical activities in the foreign exchange market, and the good fundamentals of China’s economy supports the currency. Li’s comments on Tuesday came after President Donald Trump accused China of manipulating its currency in an interview with Reuters. The world’s two biggest economies will resume talks this week about the trade dispute after an earlier deal collapsed in May. Trump is prodding China to offer more at the bargaining table, while the Chinese foreign ministry said it was hopeful of a positive result. While the yuan has lost almost 5 percent in value against the dollar this year, it strengthened since touching a one-year low last week. The currency trades in a band on either side of a reference rate set by the central bank, with Tuesday’s fixing representing the strongest since July 26. The PBOC will step up monitoring of export companies and take measures to help those in difficulties, Ji Zhihong, director of the financial market department at the PBOC, said at the press conference. “We encourage financial institutions not to simply withdraw loans” from companies that are temporarily having difficulties but have good business prospects, he said.