The slowing global economy: the Central Banks respond

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the recent international developments, focussing on the Central Banks:

  • The IMF modestly downgraded its growth projections further in its July interim outlook.
  • One of the IMF’s concerns related to “trade wars” tensions, which appeared to be easing in July. However, President Trump announced fresh tariffs on another $300bn of Chinese imports on 1 August.
  • The ECB did not change monetary policy at its July meeting, but its dovishness in the face of sluggish Eurozone growth has heightened expectations of a cut in rates in September and further QE.
  • The Eurozone economy grew by 0.2% (QOQ) in 2019Q2 (flash estimate), to be just 1.1% higher YOY.
  • The Fed cut the federal funds rate by 0.25% to 2.0-2.25%, reversing the increase in December 2018, at its July meeting, as expected.
  • The US economy is performing relatively well. Granted, GDP growth in 2019Q2, at 2.1% (annualised), was down on Q1’s 3.1% but this is respectable by international standards. The unemployment rate is just 3.7% (July), around the lowest since 1969.
  • The Bank of England did not change monetary policy at its July meeting.
  • The Bank did, however, reduce its GDP forecasts to 1.3% for 2019 (1.5% in May) and the 1.3% in 2020 (1.6% in May), assuming a “smooth” Brexit. It now expects GDP to be flat (QOQ) in 2019Q2 (an increase of 0.2% was expected in May). The outlook for UK monetary policy would depend crucially on whether Brexit was “smooth” or “no deal”.
  • The Bank noted that market expectations for interest rates had softened. The markets are now fully pricing in a 0.25% cut during 2020H1.
  • The Bank also noted the weakness of sterling, on heightened expectations of a no deal Brexit.

UK data:

  • The only major release related to the Bank’s money and credit data. The annual growth of consumer credit continued to slow in June, when it was 5.5%.

Concerning UK politics, and Brexit:

  • Boris Johnson was elected Conservative Party leader on 23 July and became PM on 24 July. The Commons rose for the summer recess on 25 July (back on 3 September).
  • Sajid Javid was appointed the new Chancellor of the Exchequer. His in-tray includes the 2019 Spending Review and the Autumn Budget.
  • The Liberal Democrats gained the previously Conservative-held seat of Brecon on 1 August. The Conservative Government (supported by the DUP) now has an overall majority of just one in the Commons.
  • On Brexit, PM Johnson has promised to deliver Brexit on 31 October, the current legal default day. New Chancellor of the Duchy of Lancaster, Michael Gove, has been charged with overseeing the (stepped-up) “no deal” Brexit preparations.

Ruth Lea said, “…as the major forecasting institutions continue to dampen down their growth expectations, some central banks are adopting more accommodative monetary stances. The ECB is clearly concerned about the Eurozone’s sluggish economy but, truth to tell, has little left in its interest rate locker. There could be a rate cut in September. The Fed’s recent rate cut was a modest 0.25%, though it is expected there will be further easing this year, despite the still relatively robust economy. The Bank, however, implies that, if a “smooth” Brexit, there could be rate rises, albeit “gradual and limited”. If no deal, they could go either way.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

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