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20.06.2018 20:03 World Economy Review - May 2018

The prospect of a trade war is threatening the global growth outlook, which otherwise is on course for a 40-year low in unemployment, the OECD said.

Global growth is set to nudge up from 3.8% this year to 3.9% in 2019, the Organisation for Economic Cooperation and Development forecast in its biannual Economic Outlook.

The Paris-based policy forum made up mainly of developed countries had in March penciled in an estimate of 3.9% for both years.

But it trimmed its outlook for 2018 due to a weak start to the year because of temporary factors like bad weather.

The OECD said budgetary easing had taken over from central bank stimulus as the main motor of global growth with three fourths of its member countries now estimated to be loosening purse-strings, led by massive US tax cuts.

Against that backdrop, the overall OECD unemployment rate was seen falling to 5% by the end of 2019, hitting the lowest level since 1980 and setting the stage for so-far elusive growth in workers` wages.

"In spite of all this good news, risks loom large for the global outlook. What are these risks? First and foremost, an escalation of trade tensions should be avoided," acting OECD chief economist Alvaro Pereira wrote in an introduction to the organization`s biannual Economic Outlook.

The warning comes as European governments brace for the expiration of temporary exemptions on new US steel and aluminium tariffs on June 1, which has outraged Washington`s closest allies.

Though the number of trade restrictions has crept higher over the last decade, further measures could create a significant drag on growth because the global economy is now more interconnected than ever before, the OECD said.

With tax cuts boosting US investment, the world`s biggest economy was forecast to grow 2.9% this year and 2.8% next year.

As a result the Federal Reserve was expected to keep gradually increasing its interest rates, bringing the Fed funds rate to 3.25% by the end of 2019.

The euro area economy was seen growing 2.2% this year and 2.1% in 2019 as the labour market and wages recover.

The European Central Bank was seen halting bond purchases this year and increasing its negative deposit rate in the second half of 2019.

Outside the euro area, the OECD marginally raised its outlook for Britain to 1.4% growth this year and 1.3% in 2019.

The Bank of England was expected to only gradually raise interest rates given the uncertainty over Brexit.

Japanese growth was seen at 1.2% both this and next year as growing labour shortages force companies to increase business investment and hire more workers.

Outside of the OECD, Chinese growth was expected to ease gradually from 6.7% this year to 6.4% in 2019 as infrastructure investment slows in the face of tighter lending conditions and tougher government project approvals.

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17.05.2018 19:03 World Economy Review - April 2018

The International Monetary Fund`s forecast of an accelerating global growth is too optimistic, according to Qatar National Bank. QNB expects a slowdown in the global economy to 3.6% in 2018.

In its latest World Economic Outlook, the IMF forecast an acceleration in global growth for 2018 to 3.9% from 3.8% in 2017. IMF has historically held a bias for optimistic growth forecasts, The Peninsula quoted the QNB report as saying.

The IMF has repeatedly revised down its forecasts with each release of the WEO until very recently.

“We regard the IMF forecasts as too optimistic and expect a slowdown in the global economy to 3.6% in 2018. QNB Economics has therefore developed its own forecasts and we lay out below the four main reasons we expect the global economy to slow in 2018,” QNB noted in its weekly economic commentary.

Listing out the reasons for a possible global slowdown, QNB analysts said: “First, recent economic data suggests that the global economy has already begun to slow. The latest global Purchasing Managers Index survey, released at the beginning of April, was the weakest in 16 months.

“While the reading of 53.3 is still in expansion territory (above 50), it is below the average reading in 2017 of 53.8. Additionally, recent indicators of growth in the world`s largest economy, the US also suggest a slowdown.

“The Atlanta Fed produces an estimate of GDP in the US, based on the latest data, which points to growth of 2% in the first quarter of 2018, down from 2.9% in Q4 2017 and 2.3% for 2017 as whole.”

Second, the Chinese economy is expected to slow in 2018 due to continued policy tightening. The authorities aim to cool the property market, reign in leverage in the shadow banking sector, and further cut capacity in old industries. Q1 GDP was steady compared to the previous quarter at 6.8%, but marginally down from full-year 2017 growth of 6.9%.

Additionally, slower credit growth points to further cooling of the economy during the remainder of 2018. Credit growth slowed to 10.5% year on year in March 2018, down from a recent peak of 13.2% in July 2017.

China is the largest contributor to global growth and a slowdown in China is also likely to have knock-on effects in a number of other economies, particularly in Asia.

Third, global monetary policy is likely to become less accommodative in 2018. The Fed is expected to press ahead with planned rate hikes and the European Central Bank has halved monthly asset purchases since 1st January and is expected to wind down the program further from September.

Both the Bank of Japan and Bank of England are also expected to tighten policy. As a result, global financial conditions are likely to tighten and long-term bond yields are rising, which is likely to restrain growth.

Fourth, higher oil prices could also be a drag on growth as they reduce the disposable income of consumers in oil importing countries. Low oil prices during 2014-16 were not fully passed on to the consumer as a number of countries took the opportunity to cut subsidies.

However, since oil prices have started rising, subsidies have not been reinstated, so the cost of higher prices is likely to be more fully passed on to consumers. Oil prices averaged $55/barrel in 2017 and we expect them to average $63 in 2018 for the full year.

As a result, rising oil prices pose another headwind for global growth in 2018. The main positive driver of global growth this year is likely to be fiscal stimulus in the US, which introduced a number of tax reforms, including a reduction in the corporate tax rate from 35% to 21%.

The IMF stated in its latest WEO that it expects the US fiscal stimulus to add around 0.1 percentage points to global GDP growth in 2018. The various drags on growth that we have outlined above will more than offset the boost to growth from the US fiscal stimulus.

The expected slowdown in China alone is sufficient to subtract around 0.1 percentage points from global growth, before the knock-on effects on other economies are taken into consideration.

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13.04.2018 13:25 World Economy Review - March 2018

World trade in goods is maintaining a robust recovery, but it still might falter if trade tensions escalate further, the World Trade Organization said in its annual forecast.

Trade in goods will grow 4.4 percent this year after a decade averaging 3.0 percent a year following the financial crisis. Last year it grew 4.7 percent - much higher than the 3.6 percent forecast in September - and a further 4.0 percent rise is expected in 2019, the WTO said.

“However, this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation,” WTO Director-General Roberto Azevedo said in a statement. “A cycle of retaliation is the last thing the world economy needs.”

The United States and China have threatened each other with tens of billions of dollars` worth of tariffs in recent weeks, leading to worries that Washington and Beijing may engage in an all-out trade war.

The WTO`s 2018 forecast puts world trade growth at the top end of previous expectations, since the organization said last September that it expected 2018 growth of 1.4 to 4.4 percent, most likely around 3.2 percent.

The latest forecast raises that to 3.1 to 5.5 percent based on current GDP forecasts, but “a continued escalation of trade restrictive policies could lead to a significantly lower figure,” the WTO said.

“These forecasts do not, and I repeat, they do not factor in the possibility of a dramatic escalation of trade restrictions,” Azevedo told a news conference.

“It is not possible to accurately map out the effects of a major escalation, but clearly they could be serious,” he said. “Poorer countries would stand to lose the most.”

New trade restrictions could trigger cycles of retaliation that weigh on global trade and output, but disruption could equally come from central banks raising interest rates rapidly or from geopolitical tensions, it said.

Cyber attacks were a further risk, with potentially even greater impact on trade in services than trade in goods. Trade in commercial services grew by 7.4 percent in 2017, after two years of weak or negative growth, the WTO said.

Last year`s growth in goods trade was led by Asia, by investment spending and by higher commodity prices. China`s rebalancing away from investment and towards consumption could mean it imports fewer capital goods, putting a drag on world trade growth.

“Less investment could also help reduce overcapacity in sensitive sectors such as steel and aluminum, thereby alleviating trade tensions,” the WTO said.

Steel and aluminum were the targets of one of U.S. President Donald Trump`s three big tariff announcements this year, each more controversial than the one before.

The steel and aluminum tariffs, justified on national security grounds, came soon after a restriction on imports of solar panels and washing machines. They preceded a huge package of tariffs that Trump has proposed to punish China for its alleged theft of U.S. intellectual property.

China`s commerce ministry said that Washington`s attempts at dialogue were not sincere and vowed to retaliate should Trump escalate further.

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14.03.2018 15:09 World Economy Review - February 2018

In another sign that the “Asian century” has arrived, China is on course to overtake the euro area in the size of its economy this year.

China`s gross domestic product is forecast to reach about $13.2 trillion in 2018, beating the $12.8 trillion combined total of the 19 countries that use the euro, according to data compiled by Bloomberg. In 2017, the euro cohort edged China by less than $200 billion.

“It`ll overtake and then persist,” said David Mann, Singapore-based global chief economist for Standard Chartered Bank. “It`s a function of the economic system, institutional infrastructure, education and hard infrastructure -- all of which have been moving in Asia`s favor.”

Asia -- including powerhouses Japan and India as well fast-emerging emerging nations such as the Philippines and Indonesia -- already crowded out the combined economies of North and South America in 2016, according to data compiled by Bloomberg. And the faster average growth pace in Asia is set to be a boon to that yawning gap for many years.

China`s leaders, convening in Beijing for the National People`s Congress, have doubled down on President Xi Jinping`s ability to keep growth stable, having removed the limit on his rule. The world`s second-biggest economy is weathering a gradual slowdown as Xi tries to manage a shift from the low-wage, high-exports model of the past to a more balanced mix where stronger domestic spending plays a greater role.

To do so, China faces numerous challenges. It will have to manage ballooning debt, financial markets need to open to global investors, and the government will have to adjust to a rapidly aging population. The UN projects that a quarter of its residents will be over 60 by 2030.

China should grow at a pace of at least 6 percent for the rest of this decade and keep up a 5 to 5.5 percent rate throughout the 2020s, Mann projected. He said it`s hard to argue that growth in the euro area would be much above 2 percent for the next couple of decades.

While it`s tricky to compare the growth data across large swaths of time, the best guess as to the last time China`s economy overshadowed Western Europe was around the mid-1800s, said Aditya Bhave, global economist at Bank of America Merrill Lynch, citing figures compiled by the Maddison Project at the University of Groningen in the Netherlands.

China`s rising trajectory would help return the global economy to a state that`s persisted through most of history, with the last 150 years being an outlier in which Western economies outweighed those in the East, Mann said.

“China`s rapid re-emergence as an economic powerhouse -- remember it used to be the world`s largest economy in the 1800s -- has enormous implications,” said Rob Subbaraman, head of emerging market economics at Nomura Holdings Inc. in Singapore.

“The impact of China on global financial markets and commodities is no longer trivial. But its economic size also brings economic tensions in terms of market share competition in trade and investment” as well as foreign policy tensions, according to Subbaraman.

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13.02.2018 16:52 World Economy Review - January 2018

The International Monetary Fund said that it expects global growth of 3.9% this year and in 2019, an increase of 0.2 percentage points over the rates it predicted in October. It would be the quickest expansion since 2011.

The fund said that changes to the U.S. tax code approved in December were responsible for roughly half of the boost to growth.

"The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes," the group said in a report published ahead of the World Economic Forum in Davos, Switzerland.

The IMF expects the U.S. economy to grow by 2.7% in 2018, significantly faster than its earlier prediction of 2.3%. Growth will slow to 2.5% in 2019, but that`s still much faster than the IMF`s previous forecast of 1.9%.

America`s top trading partners will also see benefits, especially Canada and Mexico.

But the fund cautioned that the positive effects of the U.S. tax changes, which include a lower rate for corporations, would be fleeting. It said that expiring tax provisions and larger fiscal deficits brought on by the tax cuts would drag growth lower, starting in 2022.

The IMF found other reasons for optimism, saying there were "notable surprises" of faster growth in Europe and Asia.

The Eurozone economy is expected to grow by 2.2% this year and 2% in 2019, up from earlier estimates of 1.9% and 1.7%. Growth will hit 6.6% this year in China, and 7.4% in India.

"This is very good news ... but political leaders need to remember that the growth reflects a set of circumstances that will not last," said Maurice Obstfeld, the IMF`s economic counsellor.

He said that policy makers should seize the opportunity to work on "difficult reforms" to tackle inequality, reduce debt and prepare for the next crisis, which he said might be "closer than we think."

Britain, which will leave the European Union in March 2019, will be one of the few countries to miss out on stronger growth. The IMF now expects the country`s economy to expand by just 1.5% in 2018 and 2019.

The IMF said that the global economy is likely to maintain its momentum in the short term, barring a correction in financial markets.

But it also identified several risk factors that could hamper growth over the longer run, including inequality, climate change, political instability and "inward-looking policies" that could result in barriers to trade.

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