November Economic Update: A changing of the guard
Political change appears to be intensifying around the globe and this will only heighten the uncertainty for financial markets. Read more in our latest economic update
Political change appears to be intensifying around the globe and this will only heighten the uncertainty for financial markets. In the US, the likely Democrat mid-term election gains could curtail President Trump’s legislative agenda with the risk that he steps up his attacks on trade partners. The Italian fiscal saga continues with the government at loggerheads with the EU while Angela Merkel calling time on her German Chancellorship could create a political vacuum at the heart of Europe. Meanwhile, the growing prevalence of “strongman” leaders in emerging markets is likely to be another factor that will stoke geopolitical tensions and potentially lead to even greater market volatility.
The US economy remains very strong, but the prospect of additional fiscal stimulus will be diminished if, as expected, the Democrats win control of the House of Representatives at the 6 November midterms. This will undoubtedly make it more difficult to implement further tax cuts and spending increases so could see President Trump intensify his focus on “unfair” Chinese trade practices.
US growth will likely slow through 2019 though as the support from fiscal stimulus fades and tighter monetary conditions and trade uncertainty weigh on activity. Nonetheless, the tight jobs market, rising worker pay and above-target inflation suggest the Federal Reserve will remain in tightening mode for much of 2019.
With the Italian government not yielding to the European Commission’s pleas to alter the budget and Angela Merkel loosening her grip on German politics, eurozone governance is becoming increasingly hard. The slowing growth momentum is not helping either, with 2019 and 2020 now expected to see GDP growth below 1.5%. This hasn’t stopped the ECB from confirming the end of its net asset purchase for December 2018, though interest rate hikes might now be further away than previously thought.
Japan is gradually strengthening relationships throughout Asia. China is now Japan’s single largest trading export destination ahead of the US and all the other top export destinations are Asian. Japan doesn’t want a fight with Trump but can’t afford to side with him against China either.
Both the trade war and geopolitical tensions continue to escalate between the US and China. The respective relationships with Taiwan risk intensifying the situation.
There is increasing risk that Brexit talks slip into December, or even the New Year, as the UK government tries to convince lawmakers to approve a deal. We still think there will be an agreement that in the end is voted through in Parliament. But there’s a risk we won’t know for sure for quite some time, which could see the economy slow over the winter.
US mid-terms will test the conviction levels of a market generally bullish on the dollar. We cannot rule out a modest dollar correction, but given growth challenges facing the eurozone and China into 2019, it looks too early to call a turn in the dollar trend. Downward revisions to eurozone growth and ECB policy see us cut our EUR/USD profile.
In terms of rates, an issue of increasing relevance to markets is that Libor is only guaranteed until the end of 2021. This is a massive item for attention in the coming years for all participants that have a link to current Libor markets. And that extends beyond the financial markets to all types of consumer and corporate products that are currently referenced against Libor.
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2 November 2018
November economic update: A changing of the guard This bundle contains 8 articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
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