Macroeconomic Review – November 2018

Global Economy

o First IMF global growth downgrade since July 2016. Global growth will remain steady throughout 2018–19 at last year’s rate of 3.7% instead of 3.9% in the April projection. Escalating trade tensions and stresses in EM were to blame for the reduction

o The divergence in the global economy continues as growth in the US buoyed by ultra accommodative fiscal policy while the rest of the world is trying to cope with the consequences of the trade war, a rising USD interest rate and strengthening of the USD

o China’s economy continued to cool as trade war escalates. YOY growth throughout September recorded at 6.5%, the slowest pace since 2009. China’s government and the PBOC are already implementing fiscal and monetary steps in order to stimulate the economy. The pressure on the CNY continues as further measures are taken by the government to halt its depreciation

o Global bond markets were slammed causing a sell-off in stock markets after strong US data and rising oil prices created tighter-than-expected monetary trajectory that pushed Treasury yields to cycle-highs

o As the era of cheap money comes to an end, a global wave of populism puts central bankers under pressure from their governments to keep the accommodative policy. This phenomena discredits central banks and damages their ability to manage the right policy

United States

o The US economy expanded by 3.5% in Q3, above market expectation. The gain followed a 4.2% in Q2 and was led by a 4% increase in consumer spending as a strong job market and lower taxes propel demand

o The job market remains tight as the unemployment rate holds at 3.7%, lowest level since 1969. Average hourly earnings climbed 3.1% from the previous year, the biggest increase since 2009

o Leading economic indicators are pointing towards a strong growth in Q4 and into 2019, although the growth may be contained by capacity constrains and tight labor markets. While heading towards the end of the year, there are solid conditions for the factory sector.

o The housing market is the big disappointment of this year’s economy as rising mortgage rates, now over 5% for 30-year fixed loans, offset the positive effect of the strong gains in the labor market. However, optimism among the nation's home builders picked up this month hinting to a positive momentum in the coming months

o Both the overall PCE price index and the core came in exactly on target, at 2%. Rising wages are not yet translating into more widespread price pressures

o President Trump continued last month the attacks on Fed Chairman saying that “the biggest risk is the Fed” and that the central banker “almost looks like he’s happy raising interest rates”. This relentless pressure puts the Fed between a rock and a hard place and erodes its credibility


o Growth in Q3 slowed sharply to 0.6% (annually) as the slowdown in international trade, the crisis in EM and the political uncertainty  proved to be a drag on growth. YoY growth decelerated from 2.2% to 1.7%

o The unemployment rate remained stable at 8.1% in September, a record-low rate since November 2008

o Headline inflation accelerated in October to 2.2% YoY as the core inflation increased by 1.1%, above market expectation

o Growing tensions and uncertainty cast a shadow on the EUR as Angela Merkel stepped down and the influence of the populist parties collide with the old political order represented by the European Commission

o Grave concern about Italy’s budget situation as the new populist government targeted the budget deficit of 2.4% for next year. In response, Italy’s credit rating was downgraded to one level above junk (Baa3) and Italians’ bonds plunged, two events that present increasing risks to Italy’s fragile financial system

o Despite the poor growth, it seems like the ECB is determined to end its bond purchases at the end of the year and raise interest rates in the fall of 2019

o Deadlocked Brexit negotiations as UK and EU officials find it difficult to resolve obstacles and disputes as the focus is now turning to the December EU summit. The EUR and GBP could benefit from a Brexit resolution


o Q2 GDP grew only by 1.8% in annual terms, after increasing by 5.2% in Q1. BOI estimates that the GDP will grow by 3.7% in 2018 and upgraded its forecast for 2019 by 0.1% to 3.6%

o In the last few months the headline inflation as well as inflation expectation stabilized close to the lower end of the inflation target (1%-3%). The Inflation environment is expected to stay subdued in the coming months and increase again in Q2 2019 leaving BOI enough time until policy change will be needed

o Labor market conditions are tight as the unemployment rate stabilized at around 4%, wages increase at a robust pace and job vacancies are elevated

o The deterioration in the balance of payments continues as the trade deficit in the first 9 months of the year summed up to 67.2B ILS, a 80.2% increase

o The fiscal stance continues to deteriorate as the deficit in September increased to 3.35% of the GDP, the highest in 5 years, due to higher government spending and low tax income growth

o BOI decided to leave the policy on hold at its October meeting. The bank estimates that the interest rate will increase by 0.15% in Q1 2019 and another 0.25% in Q3

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November 2018 Macroeconomic Review