Growth Snapshots Ahead in a World Awash with Cheap Money

By Jonathan Cable

LONDON (Reuters) – Strong employment data from the United States in July has reignited speculation about a potential interest rate hike from the Federal Reserve in September, contrasting with the trend of other major central banks worldwide pursuing looser monetary policies.

This optimistic sentiment is likely to remain a backdrop for the global economy in the approaching week, with expected growth figures from the eurozone, Germany, and Italy. Additionally, critical data on inflation, industrial production, and retail sales in China is forthcoming.

New Zealand’s central bank is also anticipated to follow suit with a rate cut on Thursday.

In the previous week, the Bank of England made its first major move since Brexit, lowering the Bank Rate to a historic low of 0.25 percent while reviving its asset purchase scheme. The Bank hinted at further easing measures ahead. Governor Mark Carney described the recent actions as part of an "exceptional package of measures" in response to a significantly altered economic outlook following the June Brexit vote. The Bank projects stagnation in the economy for the remainder of 2016, with weak growth expected in the following year.

The European Central Bank is likewise expected to extend and broaden the parameters of its asset purchase program, influenced by sluggish growth and nearly non-existent inflation across the eurozone, according to a Reuters poll conducted last month.

Initial reports indicate that the eurozone has managed to largely absorb the economic repercussions of Britain’s exit from the European Union. However, preliminary data expected on August 12 might reveal that economic growth in the currency union slowed to 0.3 percent in the second quarter.

Germany is also set to release GDP figures, anticipated to reflect a deceleration in growth, though rising employment and wages should help sustain disposable income growth in the latter half of the year. Italy is likely to have maintained its gradual growth pace.

"With the UK possibly facing a recession, the robust performance of economic sentiment indicators in July from across the English Channel is somewhat unexpected," commented Christian Schulz from Citi.

ASIA

The Bank of Japan recently disappointed market expectations by maintaining its bond purchase levels rather than increasing them and raised concerns by announcing a policy review for September.

In Japan, economic growth is projected to have slowed in the last quarter, hampered by weak domestic demand and stagnant exports, as a recent Reuters poll indicated. This trend poses a setback for Prime Minister Shinzo Abe, who has emphasized the importance of revitalizing the economy and combating deflation as his cabinet’s top priority.

"The world’s third-largest economy remains central to global macroeconomic shifts, serving as a benchmark for both developed and emerging economies," noted Richard Iley from BNP Paribas.

While the official GDP data won’t be available until August 14, the Cabinet Office is set to release June’s core machinery orders on Wednesday, which is expected to show a rise after three months of decline.

Despite three years of "Abenomics" emphasizing revitalization through monetary, fiscal, and reform policies, there is growing apprehension in financial markets regarding the Bank of Japan’s options moving forward.

“To mitigate concerns about its limited capacity, the Bank of Japan may opt to alter its focus away from targeting the monetary base during its September meeting, which currently contradicts its negative interest rate strategy," suggested Iley.

Global investors might find reassurance in anticipated stable growth from various upcoming Chinese economic indicators. However, factors such as weak demand, decreasing investment, and increasing debt levels continue to present notable challenges for the second-largest economy worldwide.

In the coming week, Beijing will release data pertaining to trade, consumer prices, industrial production, and retail sales.

While economic growth remains well within the government’s target range, credit growth is hovering near record highs, prompting analysts to reconsider predictions for an initial Chinese interest rate cut since October.

"Although there were indications that the People’s Bank of China might implement more stimulus measures to encourage growth, recent comments suggest that the bank is content with the current growth rate, opting to maintain a ‘prudent’ monetary policy stance this year," stated Oliver Kolodseike of IHS Markit.