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July 31, 2019

Global Economy: Stimulus redux

  • The United States (US) Fed maintained policy rates in June and signaled the probability of a rate cut going forward
  • China's May trade surplus soared to a five-month high as growth in imports plunged to a three-year low
  • Energy commodity prices fell for the second consecutive month in June, led by crude oil prices

Central banks across the world are bracing for another economic slump. Amid escalatingtrade tensions and eroding business confidence, central banks are pivoting on theirmonetary policy stances and becoming decidedly dovish. While the US Fed has signaled arate cut in its dot plot, the European Central Bank (ECB) opened the door to renewed assetpurchases and further rate cuts. The Fed’s softening stance caused the US dollar index totumble in June, leading to most global currencies, including the euro and the yen, gainingagainst the dollar. The pound depreciated amid rising Brexit uncertainty and the Chineserenminbi fell on escalating US-China trade tension.


Given the stalling growth, the easing monetary policy is no surprise. While growth in Q1 2019was stronger-than-expected globally, the outlook for the remainder of the year hasweakened. A major reason is the escalating US-China tariff tension, which has caused firmsto dial back planned investment, despite still historically low interest rates. The secondordereffects of the trade war, working through the indirect channel of confidence rather thandirectly through tariff-related price increases, is also expected to weigh on growth.