Our view in a nutshell

Japan

• Despite relatively stable domestic demand, growth will remain muted as drags from real exports continue.
• We expect core CPI inflation to remain around 0.5% y-o-y for a while as it turns into deceleration in 2019.
• We expect the current YCC policy to remain untouched in the longer run, with a series of adjustments enhancing sustainability.
• The risk is renewed yen appreciation caused by our concerns over a global recession and US protectionism.

Asia

• The export-led economic downturn is spilling over into capex. We do not expect a recovery until Q4 at the earliest.
• In H2, we expect more central bank rate cuts in China, Korea, India, Indonesia, Malaysia, the Philippines and Australia.
• India and parts of Southeast Asia are the region’s new stars in terms of rising long-run potential growth.
• China: We expect policy easing to sustain given strong growth headwinds and re-escalating US/China trade tensions.
• Korea: We expect the BOK to deliver a 25bp rate cut in Q3 2019 (most likely July) and another in Q4 (most likely November).
• India: We expect the cumulative effects of monetary policy easing to support a cyclical recovery starting Q3 2019.
• Indonesia: President Jokowi’s re-election bodes well for further reforms, investment spending and potential growth.
• Australia: We see better, but still-sub trend growth, continuing low inflation and two more 25bp rate cuts (Q4, Q1).
  
  

United States

• Elevated trade tensions and other factors will likely slow growth over 2019-20 before a modest recovery in 2021.
• Recession risk is elevated, but strong consumer fundamentals will help to sustain the expansion.
• Core inflation should pick up as higher tariffs pass-through to consumer prices and labour markets remain tight.
• After cutting rates in July, we expect another 25bp rate cut from the Fed in October.
• Fed balance sheet runoff ended in August and we expect expansion starting in Q4 2019.
• Notable risks include aggressive trade policy, unresolved fiscal issues and further deterioration in financial conditions.

Europe

• We have revised down our GDP growth forecast. The recession in euro area manufacturing risks spilling over into services.
• We see euro area core inflation rising gradually due to capacity pressures, but remaining well below the ECB inflation aim
• ECB President Draghi’s Sintra speech was a game-changer and we now expect a package of easing measures in September
• We have raised the tail risks of both a no Brexit and no deal, though continue to base our forecasts on a free trade agreement.
• We see the run rate of UK growth returning to around its trend rate in 2020.
  
• BoE rules of thumb suggest rate hikes of around 75bp are needed to tackle a 0.3% inflation overshoot on the forecast horizon.
• We see the BoE raising rates once a year from May 2020, which is a later and more gradual tightening than previously expected.

For more information read The Economy Next Week: Slowing China and rate cuts Asia