Date-July 26 ,2018
U.S. Economy Set to Benefit From China Slowdown as World Suffers
The U.S. would probably benefit from a sharp slowdown in China’s economy even as the rest of the world suffers, according to calculations by Germany’s Bundesbank. What may seem like a counter-intuitive scenario has its roots in trade relations. The U.S., the world’s largest economy, imported goods worth more than $500 billion from China last year, over three times as much as it exported to the country. The Bundesbank says lower prices in the Asian nation because of weaker growth would be a stimulus for U.S. private consumption and investment, bolstering American output by as much as 0.2 percent over two years. The estimate also assumes the Federal Reserve would react more strongly to a Chinese slowdown than the European Central Bank when setting monetary policy. While prospects for the Chinese economy remain favorable overall, a steep increase in company debt and opaque financial linkages pose non-negligible risks, the Bundesbank said in its monthly report. Standard economic models based on expectations of a general demand shock may understate those risks, it said. That’s a concern for much of the world economy. History shows that the financial crises that follow extraordinary credit growth have a more pronounced impact on domestic investment than on private consumption. Since Chinese investment tends to draw on imports such as machinery, countries providing those goods — including Germany — may be more exposed than widely assumed. Using an adjusted model, the Bundesbank calculates that global gross domestic product without China would be damped by 1 percent over two years, instead of the 0.7 percent estimate in a standard model. The central bank cautioned that even those predictions might turn out to be too optimistic. The models assume a stable Chinese currency and don’t take into account a potential deterioration in global economic confidence.
ECB Keeps to Policy Path to End Bond Purchases
The European Central Bank stuck to its plan to end bond purchases as the European Union and U.S. stepped back from a trade war and the currency bloc’s economic expansion remained solid. The Frankfurt-based institution reiterated it will continue buying 30 billion euros ($35 billion) of assets a month until the end of September, reduce the pace to 15 billion euros from October, and stop additional purchases at the end of the year. It also pledged to keep interest rates unchanged “at least through the summer of 2019,” and repeated that additional support will come from its policy of reinvesting maturing debt. Attention now turns to President Mario Draghi’s press conference at 2:30 p.m. in Frankfurt. decision comes a day after European Commission President Jean-Claude Juncker and U.S. President Donald Trump agreed to work toward lowering barriers to transatlantic commerce. That pulled them back from the brink of a trade spat that would have seen levies imposed on American imports of European cars. Draghi has singled out rising protectionism as the main risk for the euro area’s expansion, a sentiment echoed on a global level by economic leaders gathered for a Group of 20 meeting in Buenos Aires last weekend. “Downside risks to the outlook mainly relate to the threat of increased protectionism. A strong and united European Union can help reap the benefits of economic openness while protecting its citizens against unchecked globalization.”– Draghi at European Parliament in Brussels on July 9. Those concerns might be held at bay for now as political leaders, who have seen confidence in the euro-area economic outlook decline in recent months, explore the grounds for a deal. In the meantime, domestic momentum in the region is showing signs of recovery after a slowdown earlier this year, with lending to companies gaining the most in nine years in June and consumer confidence well above its long-term average.
For much of Bank of Israel Governor Karnit Flug’s five-year term, she fought tooth and nail against shekel bulls as they propelled the currency to record highs, undercutting exporter profits. Now, as the shekel finally weakens amid a global surge in the dollar, Flug is facing a new conundrum: what to do about the reappearance of inflation as her term comes to an end? If she adopts a more hawkish stance, she risks giving back the shekel weakness she fought so hard for. If she sticks to her current policy, she risks falling behind on rising prices. For now Flug is prioritizing the currency, charting out a slow trajectory of interest-rate increases. At the bank’s July 9 monetary policy discussion, Flug said the central bank wants to see annual inflation inside its target range of 1 percent to 3 percent for several months before it will begin normalizing rates. For Rafael Gozlan, chief economist at Israel Brokerage & Investments Ltd., that signals further shekel weakness ahead. “Flug’s announcement that the Bank of Israel intended to wait until inflation, especially actual inflation as opposed to expectations, settled down, essentially positions the bank behind the curve at this stage,” said Gozlan. He predicted that inflation-linked bonds would gain as the market’s inflation expectations rise. As in the rest of the developed world, inflation has largely been absent in Israel for the past three years but is now rising, spelling the end of the global easy-money era. The BOI’s monetary policy committee has kept its benchmark interest rate at a record low of 0.1 percent for the past three years and bought billions of dollars to keep the shekel from appreciating too quickly. Leading up to the last rate decision, investors started betting the central bank would get ahead of the curve and signal a more hawkish stance. With prices rising for everything from wages to rent to food, Israel’s benchmark bond yield surged 19 points higher in the month leading up to the decision. Then came Flug’s carefully worded message on inflation, which investors interpreted as dovish, sending yields down 14 basis points in the two days following the decision. “We believe that despite the overall rise in headline inflation and robust growth dynamics, the monetary policy committee will deliberately keep its dovish communication style at least until year-end in order to fend off renewed appreciation pressure on the shekel,” said Christian Wietoska, emerging-markets fixed-income strategist at Deutsche Bank AG in London.