The UK GDP growth was at +0.4% during the second quarter (1.5% at annual rate). The carry over growth for 2018 at the end of the second quarter is 1%.
I have updated my graph on the deviation from the pre-referendum trend. There is no catch up while Eurozone countries are still above the trend. The impoverishment of the United Kingdom after the referendum continues. Not sure it was a good idea for the Bank o England to increase its main rate this month. The increased uncertainty on the Brexit negotiation will not allow a rapid reversal as uncertainty is the main enemy of long term investments, those which improve productivity.
Central bankers are progressively adopting a pro-cyclical behavior. The global growth momentum is now lower and central banks’ strategy now have a restrictive bias. In the US, Canada, UK and in many emerging markets, central banks’ rates are higher than at the beginning of the year. This has already changed expectations and it will continue with a downside risk on the economic activity.
The Fed’s meeting today is an opportunity to show the dramatic monetary policy divergence between the US central bank and the ECB and the risk for a stronger greenback.
The first graph shows the gap between monetary policies’ expectations in the two countries. The measure here is the 2 year rate in 1 year. The time scale begins with the Euro Area inception in 1999.
The divergence between the two central banks’ strategy has never been so important. It’s a strong support for the US dollar which will continue to appreciate and it’s a source of risks for emerging countries. The strong probability of a US tighter monetary policy in a foreseeable future will support capital outflows reducing liquidity on these markets. Continue reading