United States resume the role of engine of the global economy

After a year of synchronised growth, the United States are resuming the role of engine of the global economy. Thanks to the tax reform, corporate investments and household consumption are accelerating.

After a year of synchronised growth, the United States are resuming the role of engine of the global economy. Thanks to the tax reform, corporate investments and household consumption are accelerating, “generating annual GDP growth in the second quarter that is expected to exceed 3% for the first time in three years”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI – Banque de Luxembourg Investments. “Inflation is now at the upper end of its range in recent years.” In May, headline inflation increased to 2.8%. The Federal Reserve’s preferred indicator, the PCE (personal consumption expenditures) deflator excluding energy and food, rose from to 2%, reaching the monetary authorities’ target for the first time since the beginning of 2012.

Europe: less dynamic economy at present
In the eurozone, economic indicators are pointing in the right direction, but are still below the heights seen at the start of the year. “In contrast to the United States, Europe is following a much more marked fiscal discipline, which has resulted in a rather less dynamic economy at present.” In Japan, growth has slowed slightly compared to the high levels seen last year, the increase in real GDP having dropped to 1.1% in the first quarter. In China, the government’s efforts to contain debt in the country led to a slowdown in investment and household consumption in the first five months of the year. “The recent reduction in the banks’ required reserve ratio suggests that Beijing will not sit on the sidelines if there is a more marked slowdown in the economy, as could result from an escalating trade war with the United States”, says the Luxembourgish economist.

US Fed raises key interest rate for the second time in 2018
As expected, the US Federal Reserve raised its key interest rate in June by 25 basis points, for the second time this year. “The monetary authorities are still forecasting two further hikes before the end of the year, which would take the upper limit of the Fed Funds Rate to 2.5% in December.” In the eurozone, European Central Bank’s President Mario Draghi signalled an end to the quantitative easing programme by the end of the year. Monthly asset purchases will be cut from the current 30 billion euros to 15 billion euros from October and will end on 31 December 2018. Draghi also indicated that interest rates would remain unchanged at least to the end of summer 2019.

The weakness of many emerging market currencies weighs heavily on their equity markets
Equity markets saw little change in June; the MSCI All Country World Index net total return expressed in euros dropped back slightly. Over the month, the S&P 500 in the United States was slightly higher, while the Stoxx 600 in Europe and the Topix in Japan retreated moderately. Emerging market equities were particularly weak, with the MSCI Emerging Markets index giving up 4.6% (in USD). “The weakness of many emerging market currencies such as the Turkish lira, the Brazilian real and recently the Chinese yuan, weighs heavily on the equity markets of the countries in question”, concludes Guy Wagner. “Generally speaking, the escalating threat of trade wars coupled with less abundant cash in dollars as a result of steady monetary policy tightening in the United States is currently a damper on the equity markets.”

Guy Wagner, chief investment officer at BLI – Banque de Luxembourg Investments

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