Governor Tiff Macklem has voiced concern about the inflationary impact of the loonie, but we doubt that a modest fall would prevent the Bank of Canada from pausing its tightening before the Federal Reserve. At US$0.78, the loonie is far lower than the …
28th July 2022
We held an online Drop-In event yesterday to discuss our Q3 Global Economic Outlook and the forecasts within it (see an on-demand recording here ). This Update addresses several of the client questions that we did not have time to answer during the event. …
This Update was originally sent to clients as a Rapid Response immediately after the readout of the Politburo’s quarterly meeting on economic affairs was published by state media. The readout of the Politburo’s quarterly meeting on economic affairs has …
Household consumption has been weaker in Spain than in other big euro-zone economies, reflecting the slow rebound in tourism, more limited fiscal support and higher inflation. The latter is set to persist, while rising interest rates are a new headwind. …
The Fed’s decision to raise interest rates by a further 75bp to 2.25%-2.50% takes them close to their “neutral” level. With inflation set to fall and mounting signs of economic weakness, we suspect officials will be more cautious raising rates from here, …
27th July 2022
Real disposable household incomes will continue to be propped up until mid-2023 by fiscal transfers intended to offset the impact of virus disruption and rising inflation. But spending will continue to be held back as consumers remain cautious amid …
The decision by Gazprom to cut natural gas supplies to Europe to 20% of capacity has caused gas prices to surge and raised the risk of energy shortages during the winter. A full gas cut-off would result in self-inflicted pain for Russia. For the rest of …
Risks rising, but recession still far from inevitable While the deterioration in the survey data and renewed inversion of the Treasury yield curve imply that the risks are rising, our composite models suggest that the economy is still more likely than not …
Bank lending growth accelerated further in June, but lenders expect the demand for loans to slow sharply in the coming months, adding to the reasons to expect the economy to fall into recession. Meanwhile, banks in the periphery are tightening the Ts and …
The news today that Gazprom will further reduce its natural gas supply to Europe increases the likelihood of recessions in the euro-zone, UK and parts of Emerging Europe. It also supports our view that inflation pressures will be relatively persistent in …
26th July 2022
With global economic growth weakening and risk sentiment unlikely to rebound sustainably this year in our view, we think that EM currencies generally will remain under pressure over the next several months and that there are a handful of countries where …
Italy’s next government is unlikely to bring the country’s future in the euro-zone into doubt, in a repeat of the turmoil that we saw after the 2018 election. But it will probably run looser fiscal policy and find it more difficult to pass reforms. If it …
US equities have plunged this year, but the S&P 500’s valuation remains a long way from looking low on most measures, including Shiller’s CAPE. This is a key reason why we expect the returns from US equities over the next decade or so to fall well short …
25th July 2022
A rebound in tourism will cushion some of the blow to Spanish prime retail demand caused by falling real incomes this year. But once inflation eventually eases, we expect rent growth to outperform other European markets, supported by a rebound in consumer …
Our view that GDP growth will slow below potential next year assumes one of the sharpest falls in dwellings investment in Australia’s modern history. However, this Update explains why dwellings investment could hold up better than we’re anticipating. In …
Another month, another set of downbeat PMIs for advanced economies. The demand indicators weakened markedly in the US and the euro-zone for the second month in a row, crossing over into recessionary territory. The flipside of the softer demand is that …
22nd July 2022
The contrast between the strong performance of the apartment sector and the weak performance of offices in the last two years has made office-to-residential conversions more viable, but the numbers still don’t appear to stack up in most cities. In fact, …
Despite their recent rebound, we still think that “high-beta” developed market (DM) currencies will weaken further against the US dollar for the remainder of the year. DM currencies have risen against the greenback over the past week or so, reversing some …
The ECB’s 50bp rate hike today is likely to be the first move in a sustained interest rate hiking cycle which we think will bring the deposit rate to around 2% next year. We also think the Bank will at some point have to use its new asset purchase …
21st July 2022
Romania’s current account deficit is likely to rise to almost 9% of GDP this year. While a weaker currency would help to reduce this shortfall, structural reforms are needed to boost competitiveness in the long term. Until then, Romania’s deteriorating …
South Africa’s central bank upped the pace of tightening further with a 75bp hike, to 5.50%, as policymakers’ intensifying fears about inflation (and inflation expectations) trumped any concerns about the slow and bumpy economic recovery. The increasingly …
The rise in local currency bond yields across the emerging world poses a particular risk to fiscal positions in those EMs with large government financing needs and a short average debt maturity. Egypt, Pakistan, and Ghana stand out as those most …
While the valuation of the S&P 500 has fallen a long way, we don’t expect it to rebound any time soon; this is one reason we expect the index to continue to struggle over at least the remainder of this year. The backdrop for US corporate earnings looks …
Bank Indonesia (BI) left interest rates unchanged again today, and the dovish commentary from the press conference means we are pushing back the timing for the first hike from Q3 into Q4. With growth set to slow over the coming quarters and inflation to …
The Bank of Japan didn’t concede any ground to bond traders today but we still think there’s a good chance that it will widen the tolerance band around its 10-year yield target . The Bank kept its short-term policy rate at -0.1% and its 10-year yield …
It looks like Italy is heading for an early general election. While that won’t necessarily cause an economic and financial crisis, bond spreads are likely to widen regardless of what the ECB announces later today. After the Lega, Five Star Movement and …
The Q2 ECB bank lending survey showed a tightening in credit standards for commercial property lending in the first half of the year, with expectations for a further squeeze in H2. With the cost of debt also higher, more restrictive credit will weigh on …
20th July 2022
The latest revisions to our UK economic view indicate that a recession is now unavoidable. This will weigh on commercial property performance into next year, but the dip is expected to be fairly mild and as such we have made only modest downward revisions …
We’ve recently received several questions from clients on how the near-term outlook for India is shaping up. This Update summarises our big picture views for the next six months or so by providing answers to five key questions. Question #1: What is the …
We doubt that the upcoming review of Australia’s monetary policy framework will result in a change to the RBA’s 2-3% inflation target. But the Bank could be forced to put more emphasis on house prices, reduce the frequency of Board meetings, and …
The Central Bank of Nigeria (CBN) followed up May’s 150bp interest rate hike with a 100bp increase in the benchmark rate today, to 14.00%, as worries about inflation continued to mount. We now expect a 50bp hike at the next MPC meeting, although with …
19th July 2022
Although we doubt that they will fare quite as badly as they have in recent weeks, we still expect the energy and materials sectors of global stock markets to underperform over the next couple of years. Worries that high inflation, and the large interest …
Europe’s heightened demand for LNG will be enough to keep prices high this year and into 2023, particularly as LNG supply growth will be fairly limited . The Asia-based spot price for LNG, together with its European counterpart (TTF), soared in the wake …
18th July 2022
Despite the Q1 surge in investment activity, we think a weak rental outlook and stretched valuations will deter a sustained increase in investment, limiting the scope for further falls in prime industrial yields. There was strong investor demand for prime …
While a lot of attention has focussed naturally on the potential implications for the JGB market of a further tweaking of the Bank of Japan’s Yield Curve Control (YCC), the country’s huge investment in markets overseas means that they too might …
15th July 2022
The large-scale deterioration in office NOIs that we predicted would occur by the end of 2025 appears, on the face of it, to be some way off. But offices are the only sector seeing rising delinquency rates, and with office utilisation rates topping out …
We expect the Mexican peso to fall further against the US dollar amid mounting external headwinds. As the dollar has appreciated to multi-decade highs against major developed market currencies, such as the euro and the yen, it has also extended its gains …
As metals prices soared early in the year, we cautioned that they would end the year lower owing to soft demand growth. Prices have since plunged. Now, we think they may have a little further to fall, before finding a floor as China’s demand moves up a …
With the DXY index surging to a fresh 20-year high, the US dollar has reached our end-2022 forecasts against several of the other major currencies. While we are sticking to our current forecasts for now, this Update considers how the factors underpinning …
Inflation rose to multi-decade highs in much of Latin America last month and, while it should peak in Q3, headline rates will remain uncomfortably high for some time. Central banks in the region started tightening policy earlier than elsewhere and, …
14th July 2022
We held a Drop-In earlier today to discuss recent developments in Sri Lanka, where the economic and political crisis is going from bad to worse. This Update answers several of the questions that we received. How bad is the economic situation? In a …
We think “quantitative tightening” (QT) may put upward pressure on long-dated Treasury yields over the coming years. But we think that changes in investors’ expectations for the fed funds rate will remain a far more important driver of these yields and …
If the return of political instability in Italy leads to an early election, government bond spreads are likely to widen, whether or not the ECB agrees the details of the Transmission Protection Mechanism next week. The Five Star Movement has abstained …
Ageing populations will be one of the main structural challenges facing many economies over the coming decades. Ahead of a series of work analysing what can be learned from countries ageing rapidly, this Update starts by looking at which those are. The …
The effects of the pandemic followed by the war in Ukraine have pushed a growing number of EMs into debt distress. And while some (Tunisia, Ghana) look likely to follow Sri Lanka’s path into default, at this stage, default risks in the largest EMs look …
The resumption of the loan deal between Pakistan and the IMF should put the economy back on a more secure footing and limit the biggest downside risks. But the cuts to government spending that the deal requires, combined with hikes to interest rates, will …
The decision by the central bank in the Philippines to raise its benchmark policy rate by a further 75bp (to 3.25%) at an unscheduled meeting reflects mounting concerns about inflation. Further hikes seem likely, and we are changing our end-year forecast …
The city-state’s economy unexpectedly stagnated in the second quarter but this didn’t prevent the MAS from tightening monetary policy today in a bid to tackle high inflation. While we expect output to start rising again during the second half of the year, …
The Bank of Canada’s 100 bp hike today and its accompanying communications have led us to upgrade our forecast for the policy rate to 3.5% by the October policy meeting, from 3.0%. As the commodity price and global supply chain assumptions underpinning …
13th July 2022
Structural changes to how we live, work and shop have supported retail warehouse rents over the last couple of years relative to other retail sub-sectors. We expect this outperformance will continue, although even here rental growth will slow as consumer …
