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US: Overall growth is expected to be close to 3 per cent this year
Eurozone: The growth slowdown in Q1 warrants some attention, but was probably necessary
UK: The UK continues to be a growth laggard among developed nations
China: China’s start to the year has been strong with growth surprising to the upside
Japan: Growth has stumbled during Q1 with domestic demand faltering
Canada: While growth continues to moderate it has been underpinned by consumption and investment
Modestly softer growth in 2018 Q1 should prove temporary, with a strong bounce-back expected in Q2. Overall growth is expected to be close to 3 per cent this year. Headline inflation is expected to remain above 2 per cent this year as underlying inflation strengthens and as energy continues to contribute.
We expect the Federal Reserve will deliver four rate rises in each of 2018 and 2019.
The growth slowdown in Q1 warrants some attention, but was probably necessary.
2018 will still see above-trend growth and there is far less slack remaining. Inflation is returning, slowly, but a continuation of 3 per cent annualised growth could have led to unwelcome overheating. The ECB has, unusually for them, provided very clear guidance on their policy intentions: asset purchases will stop at the end of 2018, while policy rates are not expected to rise until the second half of next year. Higher energy prices have boosted headline inflation. The Eurozone now needs to see core inflation move closer to 2 per cent than 1 per cent.
The UK continues to be a growth laggard among developed nations.
Paltry growth of just 0.1 per cent in Q1 may have been partly weather-related, but Q2 does not look to have seen much improvement (or payback). With inflation also falling faster than the Bank of England had expected, the pressure for early rate rises has diminished. The Bank has stressed that supply potential is now only growing at around 1.5 per cent a year. But demand is struggling even to match that.
If growth does not recover, or if Brexit uncertainties continue or worsen, the Bank may postpone again. The labour market has, surprisingly, remained robust, although strong jobs growth may be more a reflection of a gloomy productivity story.
China’s start to the year has been strong with growth surprising to the upside, though the most recent data on credit and fixed investment point to the risk that a slowdown is underway.
While growth is likely to slow further, policymakers have clearly recalibrated their strategy towards deleveraging as seen in lower wholesale funding rates and three RRR cuts. Trade war risks pose further downside risks, but policymakers may well act to stimulate domestic demand to offset the growth impact through policy easing. CPI inflation has stabilised slightly below 2 per cent, which allows the PBoC space to shore up activity if needed.
Growth has stumbled during Q1 with domestic demand faltering after contributing strongly to GDP last year. But temporary factors such as weather have been the major driving force behind the loss of momentum, though clear risks have emerged from US protectionism.
Having said that, survey data has continued to present a picture of a reasonably strong business outlook and consumer confidence. While wage growth has shown some signs of a modest pick-up, the spring wage negotiations were largely disappointing, keeping inflation at subdued levels and ensuring BoJ policy continuity.
While growth continues to moderate it has been well underpinned by consumption and investment. Overall therefore, activity in the Q1 was slightly stronger than the BoC forecast and the economy continues to operate close to capacity.
Consumption should support growth given the solid improvement in wage growth. Core inflation measures have increased to around 2 per cent. Going forward pressures remain to the upside. So far this year, the BoC has raised rates by 25bp and another 2 hikes are expected by market participants before the end of the year.
A higher rate environment will likely alter the composition of growth going forward with a declining contribution from household spending and more from investment and exports on the back of higher oil prices.
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