Economic Outlook: June

Global economy: The eurozone economy is feeling the impact of these events. Tariff threats and political convulsions are putting a damper on business activity. It should not be assumed, however, that the eurozone is headed for recession. What we are likely to see is a phase of slower growth.

USA: The US economy gained momentum in the second quarter, powered by rising personal consumption and robust investment growth. Thus the world’s largest economy is a prime driver of global economic expansion this year. Meanwhile, the Fed will stick to its policy of moderate interest rate hikes. Core inflation (excluding volatile energy and food prices) is not yet alarmingly high, so dramatic action by the Fed is not on the cards.

Eurozone: Important leading indicators have recently sagged. Worries about tariffs and a possible trade war, combined with political uncertainties in Italy, are dampening business sentiment. But even without the spectre of global trade disruption, it looks as if the cyclical upturn may now have peaked. That does not mean that the eurozone is heading for recession but merely that growth in the coming quarters will be somewhat weaker. The European Central Bank will terminate its asset purchases at the end of this year, but interest rates will stay very low for a long time to come.

Germany: Germany’s economic performance this year has been disappointing. Sentiment indicators are weakening, and so are the hard data. New orders in the manufacturing sector have been relatively feeble so far. We will have to await overall results for the first half year to see whether the German economy can live up to our optimistic forecast.

Switzerland: Swiss GDP expanded by 0.6% in the first quarter of 2018 compared with the final quarter of 2017. Growth was driven primarily by investment in plant and equipment. Exports were strong, but import growth was even stronger, with the result that foreign trade had a slightly negative net impact on GDP growth. The State Secretariat for Economic Affairs SECO has highlighted an interesting aspect: as major sports organisations such as the European football union UEFA, the international football federation FIFA and the international Olympic committee IOC are domiciled in Switzerland, their income from broadcasting rights and licence fees flows into Swiss GDP. Without the contribution of these major sporting organisations, GDP would have grown by only 0.4%.

Emerging markets: The situation in Turkey is acute. A plunging Turkish lira is aggravating the burden of dollar-denominated public debt and undermining the country’s credit standing. Previous years had already seen a gradual erosion of investor confidence in reaction to the populist policies of Prime Minister Erdogan, but this year the situation has come to a head. Erdogan fanned the flames by hinting that he might curtail the independence of Turkey’s central bank. The upshot was a full-blown currency crisis. A 300 basis point interest rate hike by the central bank brought a degree of stability on the forex markets, but the danger is by no means over. This confirms our start-of-year assessment of the outlook for the emerging markets. In our annual forecasts we referred to country risks and made explicit mention of Turkey. However, the current crisis in Turkey will not spark a general conflagration. Most emerging economies are on a recovery track or are at least performing stably.