Recent QET

Recent QET

2018Q1: Implication of trade war between US and China

1 April 2018

Executive Summary


World Economic Situation and Prospects for 2018

  • Global economy in the ninth year of expansion.Continuing a synchronized economic upswing in 2017, the global economy should maintain strong growth momentum, albeit somewhat balanced of risks in 2018, marking the ninth year of economic expansion since 2008-09 Global Financial Crisis.
  • Activity indicators point to continued global growth. Tracking of current and forward indictors lend credence to our assessment that the global economy remains in a healthy clip: steadying trade expansion, higher manufacturing and services activities, steadying commodity prices, low unemployment, high levels of corporate profits, moderate inflation (at least for now) and still accommodative interest rates, though the Fed’s guidance of future path of interest rate hikes is somewhat hawkish.
  • Broadening growth in advanced economies. The US economic expansion, which had picked up pace to average 2.4% in 2H17, will continue to grow above-trend pace of growth in 1H18 as lower income tax and corporate tax cuts promote increased consumer and investment spending. The European economy’s momentum will be sustained in 2018, supported by rising employment, high levels of sentiment and a loose monetary policy. Amid a slow start to the year, Japan is likely to show decent growth, thanks to very low unemployment that supporting consumption. Backed by political stability, China will continue to focus on sustaining the quality of economic restructuring growth, safeguarding financial stability and controlling its bloated debt. There seems little reason to fear an abrupt slowdown
  • Rising interest rate trend to continue in 2018.The year 2017 witnessed a number of major central banks raised interest rates, a trend that we expect to continue in 2018 and raises the spectre of convergence global monetary policy. The economic effects of interest rate increases should be manageable unless inflation rises faster than expected, compelling more aggressive rate hikes. We believe that the US Fed Reserve will continue to be relatively aggressive, raising interest rates between three and four times in 2018. The European Central Bank (ECB) is unlikely to change its interest rate course any time soon at least until the expiry of the bond purchases by September this year. Bank of Japan (BOJ) could be the last of the big central banks to change the course of monetary policy though some board members voiced the consideration of raising interest rates or slow purchases of risky assets if the economic recovery continues.
  • Keep an eye on event risks.As in 2017, 2018 does have the potential for some pockets of event risks and market turbulences, some of which could stem from the unpredictable behaviour of President Trump and his loyalists. Trade barriers is one of the most closely watched trade policy risk. The Fed’s aggressive interest rate hikes remain a possibility if interest rates were to rise faster. The recent spike in the 10-year Treasury yields to near 2.90% underlies investors’ nervousness about inflation stemming from rising wages and tight labour market. Other risks arise from the continued geopolitical tensions in the Middle East and North Korea or some political/election hotspots in Europe, and in a multitude of Latin American countries.

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