2Economic Research Global Data Watch November 16, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan news is mixed, with positive signals from the US and Chinaoffset by disappointment on European growth and politics. Onbalance, we maintain our view that temporary drags in Europewill fade and China will stabilize this quarter, but see risksskewed to the downside.Europe: nervously waiting for a rebound Based on these criteria the news from Western Europe is dis- couraging. We have argued that the Euro area growth slidelast quarter—when regional GDP posteda meagre 0.7%argain—was driven by a disruptionin the auto sector due tonew emissions standards.Industrial activity should reboundthis quarter fueling a return to 2% GDP growth. Althoughthere are clear signs that the auto sector drag is fading, theOctober PMI and the slowing in job growth last quarter sug- gest that the underlying growth trend may have softened (Fig- ure 3). Italy’s budget conflict with the EU may be part of theproblem. Last week we halved our Italian growth forecast fornext yearto 0.7%, but the latest data are consistent with some- thing worse than that. Next week’s Euro area flash PMI reportfor November will need to movehigher to track our views andwe look for a 0.7%-pt risein the all-industry reading. UK news has also disappointed. Activity surveys weakened inOctober, pointing to a growth slowdown this quarter. Whilewe had anticipated some payback from the weather-relatedboost to spending in 3Q, there is evidence of an impact fromweaker regional growth as well as hints of additional dragfrom the rise in Brexit uncertainty. Business and consumerconfidence have held up relatively well through October, buta larger deterioration this year appears likely. We recentlyrevised down our current-quarter growth forecast by 0.5%-ptsto 1.5% to reflect the latest weakening in the survey data butwe continue to see downside risks around our forecast.Brexit: Jumping into the ring of fire Although not surprising, political tension also is rising in theUK as the Withdrawal Agreement between the UK and EUlooks unpalatable to many UK politicians. We have enteredthe political “ring of fire” drama that we anticipated. Thisweek two cabinet members resigned and the DUP and othersstated that they will not support May’s Withdrawal Agree- ment. PM May is likely to win any vote of confidence in herleadership of the Conservative party comfortably, and hasstated she will continue to argue for the deal she had agreedwith the EU. When the Commons gets the chance to vote onthe Agreement in early-mid December, it looks certain to re- ject it. But we expect that Labour’s subsequent push for anearly election, Brexiteers’ push for renegotiation or no-deal,and remainers’ push for a second referendum all will run intothe sand. In such a febrile political environment events areunpredictable. But we expect that a majority of MPs will ul- timately back May’s deal at a second or later vote. Better news in China as we wait on trade The news from China has been more constructive as we awaitthe upcoming meeting between Presidents Trump and Xi. Thesignal fromOctober releases is that growth is stabilizing asthe anticipated turn in infrastructure spending is now evident.Infrastructure investment spendingreboundedtoa6.7%oyapace in October—an impulse that pushed overall fixed assetinvestment gains up to an8.3%oyapace. To be sure, autosales and corporate credit demand were weaker than expectedlast month. But these drags did not derail the modest pickupin industrial production starting to take hold.The pickup in infrastructure spending is likely to fade as weturn into the new year, but Chinese policymakers are signal- ing that more easing is in the pipeline. Broad-based tax cutslook set to be implemented and now appear likely to includeincome tax reductions for both households and businesses andcuts in value-added taxes and social security contributions forthe corporate sector. With higher tax rebatesfor exporters facing tariffs also likely, we now expecttax cuts to amount toabout 1% of GDP in 2019 (see “China’s fiscal package” inthis GDW). Policymakers have also sent strong signals thatthere will be further monetary easing. While our baseline sce- nario sees benchmark policy rates unchanged in 2019, weexpect policymakers guidemoney market rates lower. In addi- tion,TSF growth will likely turn up moderately next year, andwe expect twomore 100bp RRR cuts in the next 12 months. CBs with current account deficits are sensi- tive to external shiftsCentral banks facing current account deficits are generallysensitive to shifting external conditions. Over the past coupleweeks, we have modified our policy rate forecasts for Asia’s 50 51 52 53 54 55 56 57 0.5 1.0 1.5 2.0 20152016201720182019 % change q/q,saar Figure 3: Euro area: Employment and PMI output index Source: J.P. Morgan EmploymentComposite PMI3Economic Research Global Data Watch November 16, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan current account deficit countries. And next week’s decision inSouth Africa has become a close call.We now expect India’sRBI to remain on hold until 2H19even as Bank Indonesia continues on a path of steady hikes.In India’s case, this year’s oil price rise has combined withtightening labor marketsto push-up inflation above theMPC’s target and cause the current account deficit to widento unsustainable levels. Thispressuredthe Rupee and elicit- edback-to-back RBI rate hikes around mid-year. The mac- roeconomic environment is changing quickly, however, as aresult of the correction incrudeprices and the limited pass- through of agricultural support price increases. Inflation isexpected to remain benign and we now expected the RBI totakea prolonged pause (see, India: when it rains, it pours).In contrast, Bank Indonesia hiked its policy rate 25bp to 6% this week and also raised the average reserve requirementand the macro-prudential liquidity buffer. Earlier this year,Bank Indonesia emphasized thatits reaction function will focus on externaland financial stability. Action can thus belinkedto thefurther deterioration in the trade balance inOctober andanticipation of currency pressures as the Fedfunds rate moves up next month.South Africa’s Reserve Bank has consistently signaled adrift higher in the nominal repo rate and inched closer to ahike at its last meeting. We continue to look for a hike nextweek as the SARB policy stance remains accommodativeand there is a need to signal commitment to stabilizing in- flation expectations. Risks to the SARB inflation projectionfor next year are tilted to the upside anda core policy an- choris all the more importantas a path of fiscal consolida- tion is now no longer clear. This said, the recent drop in oilprices makes thedecision less clear-cut.We expectthat af- ter much deliberation, the SARB will deliver a25bp ratehike, followed by a pause at its subsequent meeting.Can CE4 decouple from Eurozone The trade links between the CE4 region and Germany arevery strong. However, CE4 growth has consistently buckedthe trend toward German slowing this year. In fact, CE4 re- gional GDP growth was robust last quarter in the face of aGerman contraction.While expenditure details are not yetavailable, this surprising divergence is most likely due tostrong growth in public investment driven by EU-related pro- jects. Available information on output and trade support thisconclusion. While exports and manufacturing activity general- ly contracted in line with Germany’s slide, there was a strong expansion of construction, concentrated in civil engineeringactivity (Table 1). It is conceivable that CE4 growth will re- main solid as exports reb