Economic growth appears on track to record a stellar performance in Q2, fueled by strong business investment, tax cuts and an ever-t...

US Economic Update June-July 2018

Economic growth appears on track to record a stellar performance in Q2, fueled by strong business investment, tax cuts and an ever-tightening labor market boosting consumer spending. In May, the unemployment rate hit a new low, and growth in retail sales accelerated as consumer confidence remained near a historic high. Furthermore, housing starts picked up in the same month, helped by rising wages and lower taxes boosting household incomes. Survey data for May indicates the private sector has so far been unfazed by current tensions with trade partners, although President Trump’s rapidly escalating rhetoric vis-à-vis China in past weeks could prove damaging to business confidence. The month ahead might represent a critical junction, as new restrictions on investments between Chinese and American firms are set to be unveiled on 30 June, while reciprocal tariffs with China and retaliatory measures from Canada will take effect in early July. 

The exceptional domestic momentum has so far been unmarred by signs of moderating growth in key trading partners. Although recent tariff measures will likely have minimal impact, the increasingly likely escalation of the dispute with China into a trade war is a major downside risk, which could weigh on business sentiment and investment. Faster monetary policy tightening and high fiscal deficits should further dampen growth in the medium-term. FocusEconomics panelists see GDP expanding 2.8% in 2018, unchanged from last month’s estimate. 

In 2019, growth is seen moderating to 2.4%. Inflation hit a 5-year high of 2.8% in May, up from 2.5% in April. The 12–13 June FOMC meeting communiqué suggests the Fed is satisfied with the current underlying inflation trend and might tolerate inflation overshooting its target for a limited period. Inflation is likely to remain strong in the near term thanks to buoyant growth, before moderating next year. Our panel sees inflation averaging 2.5% in 2018 and 2.2% in 2019. 

The Federal Reserve raised the federal funds rate by 25 basis points to 1.75%–2.00% at its 12-13 June FOMC meeting. It also raised its median projection from three hikes to four in 2018, meaning two more rate increases are now the baseline scenario for this year. This assessment is shared by our panel, which expects the federal funds rate to end 2018 at 2.44% and 2019 at 3.06%. An increasing interest rate differential coupled with strong economic data pushed the dollar higher against main trading partners’ currencies in June. On 22 June, the dollar index traded at 94.5, a month-on-month strengthening of 1.0%.

Decent read here on how the lack of union membership has allowed for greater wage inequality. My argument is that we are more deal...

Princeton economists find that unions had historical role in helping address income inequality

Decent read here on how the lack of union membership has allowed for greater wage inequality. My argument is that we are more dealing with a third and fourth industrial revolution, coupled with subsequent labor issues, on a system which greatly rewarded the entrepreneur and capitalistic class. Payroll and wages are - by design - capped at levels. The largest offenders are the largest employers.
 - CH

“The labor market and economy are evolving in a way that’s giving employers increased power over workers,” he said. “Unions were, at least at one point, an important institution for resisting and adding some balance.”

Sales of new single-family houses in May 2018 were at a seasonally adjusted annual rate of 689,000, according to estimates released j...

Census Housing Report

Sales of new single-family houses in May 2018 were at a seasonally adjusted annual rate of 689,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.7 percent (±14.1 percent)* above the revised April rate of 646,000 and is 14.1 percent (±19.9 percent)* above the May 2017 estimate of 604,000. Sales Price The median sales price of new houses sold in May 2018 was $313,000. The average sales price was $368,500. For Sale Inventory and Months’ Supply The seasonally-adjusted estimate of new houses for sale at the end of May was 299,000. This represents a supply of 5.2 months at the current sales rate.

Housing in America is going full blast. All across the spectrum there is activity and it seems to be increasing despite recent rate...

Leading Up To The May 2018 Residential Housing Census Report

Housing in America is going full blast. All across the spectrum there is activity and it seems to be increasing despite recent rate hikes. The independent builder is starting to creep out into the spectrum and speculators are taking on more risk. - CH

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,350,000. This is 20.3 percent (±14.4 percent) above the May 2017 rate of 1,122,000...

REAL SECTOR | Growth momentum stays solid in most countries, although Puerto Rico distorts the regional picture Preliminary estimate...

Central America and Caribbean Economic Outlook Worsens

REAL SECTOR | Growth momentum stays solid in most countries, although Puerto Rico distorts the regional picture Preliminary estimates suggest the economy of Central America and the Caribbean remained largely in good shape at the outset of the year, with growth expected to have reached 2.1% annually in Q1. This marks a 0.6 percentage-point downward revision compared to last month’s estimate, largely driven by a larger expected contraction in Puerto Rico, one of the region’s largest economies in nominal GDP terms. However, excluding Puerto Rico, the region’s Q1 growth figure would have seen only a mild downward revision compared to last month’s forecast. The Dominican Republic has been the region’s standout performer so far this year, with the economy buoyed by monetary stimulus that has spurred credit growth. Following a stellar Q1 GDP reading, economic activity increased at an over one-year high in April, spearheaded by the construction sector. New hotel, residential housing and energy projects currently underway are turbocharging activity in the sector, as firms take advantage of cheaper financing conditions. While national accounts figures for the first quarter are still outstanding in Guatemala, economic activity growth also edged higher in the first four months of the year compared to Q4. The picture is similar in Costa Rica: Economic activity growth in the January–April period tracked slightly higher than in October– December. Costa Rica’s fiscal situation is still worrying but has improved slightly in recent weeks, after the new government announced austerity measures to rein in the public wage bill. However, more fundamental reforms are still needed to put public finances on a sustainable long-term footing. On the other hand, the Panamanian economy has lost steam in recent months on the back of a downturn in the construction sector, which was deepened by a month-long strike paralyzing building activity in the country. To reignite growth, the government recently announced a substantial spending boost for large-scale infrastructure projects. Honduras has also seen momentum ebb so far this year due to a weaker agricultural sector, partly caused by unusually warm weather. Throughout the region, countries have seen a continuing surge in remittances so far this year, linked to a robust labor market in the U.S, where the unemployment rate is currently at the lowest level in 18 years. In May, Guatemala saw the highest inflow of 1.5 2.0 2.5 3.0 3.5 4.0 Q1 15 Q1 16 Q1 17 Q1 18 Q1 19 2.0 2.4 2.8 3.2 3.6 4.0 Nov Feb May Aug Nov Feb May 2018 2019 Central America & Caribbean Economic Growth Change in GDP forecasts Note: GDP, real annual variation in %, Q1 2015 - Q4 2019. Note: GDP, evolution of 2018 and 2019 forecasts during the last 18 months. FOCUSECONOMICS Summary FocusEconomics Consensus Forecast Central America and Caribbean | 4 June 2018 remittances on record at over USD 800 million. This influx of capital is supporting domestic wages, private consumption and international reserves. In contrast, the regional external sector’s contribution to growth has likely weakened so far this year on a higher oil import bill. On the political scene, ongoing unrest in Nicaragua is generating uncertainty and damaging the country’s relatively successful economic trajectory over recent years. Tourism and inward investment will almost certainly be hard by the upheaval—as the Central Bank’s governor recently warned—as will domestic sectors. Efforts are underway to reestablish a dialogue, which broke down in May, between the government and different sectors of civil society. Talks have yet to begin, however, and in the meantime violence continues. OUTLOOK | Regional growth revised down on worsening dynamics in Puerto Rico The Puerto Rican economy is expected to drag heavily on regional growth this year, as the economy continues to suffer the aftereffects of hurricanes Maria and Irma, and the ensuing destruction to physical infrastructure and power outages. Elsewhere in the region, the outlook is somewhat brighter. Economies will continue to benefit from fiscal stimulus in the U.S—by far Central America and the Caribbean’s largest trading partner—which should in turn continue to boost remittances, exports and tourist arrivals. However, higher international oil prices will weigh on the region’s external sector. Key downside risks stem from the potential faster- than-expected monetary tightening by the U.S. Federal Reserve— which would weigh on regional credit growth, investment and private spending—and tougher U.S. immigration policy, which could disrupt remittance inflows. Citizens from El Salvador, Haiti, Honduras and Nicaragua currently residing in the U.S. are already set to see their Temporary Protected Status end within a few years, which could lock many of them out of the U.S. labor market. FocusEconomics panelists expect regional GDP growth of 2.1% this year, which is down 0.5 percentage points from last month’s estimate. This is largely driven by a greater expected contraction in regional heavyweight Puerto Rico, as the full impact of the devastation caused by last year’s hurricanes becomes clear. There was also a notable downgrade for Nicaragua due to continuing violent unrest. Belize, Haiti, Panama and Trinidad and Tobago also saw their projections downgraded this month. Conversely, the GDP forecast for the Dominican Republic was revised upwards following the recent string of positive economy data, as was Jamaica’s. The region’s remaining economies saw their projections unchanged. Regional GDP growth is seen accelerating to 3.7% in 2019. Panama’s economy is expected to log the highest increase in the region despite a soft start to the year, the result of higher Panama Canal earnings and robust fixed investment levels. GDP in Panama is projected to increase 5.4%. Conversely, Puerto Rico is expected to be the region’s worst performer, recording a contraction of 8.0% in FY 2018.

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From The BLS : Over the last 12 months, food prices increased 1.2 percent, with prices for food away from home rising 2.7 percent, an...

Consumer Price Index May 2018

From The BLS:

Over the last 12 months, food prices increased 1.2 percent, with prices for food away from home rising 2.7 percent, and prices for food at home rising 0.1 percent. Prices for meats, poultry, fish, and eggs increased 2.3 percent over the last year; that was the only one of the six major grocery store food groups to increase.
Energy prices increased 11.7 percent over the past year, with prices for three of the four major components rising. Gasoline prices increased 21.8 percent, fuel oil prices rose 25.3 percent, and electricity prices increased 1.0 percent. Prices for natural gas fell 0.8 percent over the year.
Prices for all items less food and energy rose 2.2 percent over the past 12 months. Prices for shelter rose 3.5 percent over the last 12 months, and prices for medical care services rose 2.3 percent. Prices that declined over the past 12 months include those for new vehicles, airline fares, used cars and trucks, and communication.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis after rising 0.2 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.8 percent before seasonal adjustment. The indexes for gasoline and shelter were the largest factors in the seasonally adjusted increase in the all items index, as they were in April. The gasoline index increased 1.7 percent, more than offsetting declines in some of the other energy component indexes and led to a 0.9-percent rise in the energy index. The medical care index rose 0.2 percent. The food index was unchanged over the month. The index for all items less food and energy rose 0.2 percent in May. The shelter index rose 0.3 percent in May. The indexes for new vehicles, education and communication, and tobacco increased in May, while the indexes for household furnishing and operations, and used cars and trucks fell. The indexes for apparel, recreation, and personal care were unchanged. The all items index rose 2.8 percent for the 12 months ending May, continuing its upward trend since the beginning of the year. The index for all items less food and energy rose 2.2 percent for the 12 months ending May. The food index increased 1.2 percent, and the energy index rose 11.7 percent.

Atlanta Fed president and CEO Raphael Bostic speaks at the Rotary Club of Savannah about the Fed's recent policy move and economic resil...

Atlanta Fed CEO On Economic Resilience

Atlanta Fed president and CEO Raphael Bostic speaks at the Rotary Club of Savannah about the Fed's recent policy move and economic resilience:
  • Bostic sees output growing at a moderately above-trend pace this year and next, then slowing to a pace that corresponds with the longer-run potential of the economy, which is slightly less than 2 percent.
  • Bostic believes that community-based investment is one way to think about the kinds of local investments that help to translate growth into community assets that expand opportunity for people living in conditions of economic distress.

Argentina and the IMF reached a preliminary agreement on 7 June for a three-year USD 50 billion stand-by arrangement that will...

Outlook Worsens In Argentina

Argentina and the IMF reached a preliminary agreement on 7 June for a three-year USD 50 billion stand-by arrangement that will keep the economy afloat as the government pushes through economic reforms. While the final agreement is still subject to approval by the IMF board, the government pledged to now accelerate economic reforms, including reforming the Central Bank charter, reducing currency interventions and achieving a primary fiscal surplus by the year 2021. These measures are intended to make the economy more resilient to economic shocks and capable of achieving faster economic growth in the medium and long term. However, the tough reforms and fiscal consolidation are expected to have a negative impact on economic growth in the short term and weigh on the ongoing economic recovery. GDP is expected to have expanded solidly in the first quarter due to buoyant growth in the domestic economy. Economic growth is expected to slow sharply from 2017’s strong expansion due to fiscal consolidation measures, restrictive credit conditions and the pass-through effect of higher inflation on private consumption. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 1.7% in 2018, which is down 0.6 percentage points from last month’s forecast. For 2019, growth is expected to reach 2.5%.

National inflation inched up from 25.4% in March to 25.5% in April. Inflation is expected to remain above the Central Bank’s inflation targets for 2018 and 2019 as a weaker currency and expected subsidy cuts in public utilities will stoke price pressures going forward. Panelists expect national inflation to end 2018 at 27.4%, which is up 3.7 percentage points from last month’s forecast. For 2019, inflation is seen moderating to 19.2%.

The monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) slowed notably in March, registering a 1.4% expansion in annual terms, a sizeable moderation from February’s revised 5.0% increase (previously reported: +5.1% year-on-year). This was the slowest pace of growth since April 2017; it nonetheless marked the thirteenth consecutive month of economic expansion in Argentina. The slowdown was driven by contractions or weaker growth in most of the components of the index. Notably, economic activity in agriculture, livestock, hunting and forestry contracted 5.5% year-on-year in March (February: +3.3% yoy). Meanwhile, growth in the manufacturing industry eased to 0.8% (February: +5.9% yoy). Construction activity also slowed, expanding 5.9% in March (February: +12.7% yoy), and financial intermediation growth moderated to +3.3% (February: +7.6% yoy). A seasonally-adjusted month-on-month comparison showed that economic activity contracted for the second consecutive month, falling 0.1% in March, following a 0.2% contraction in February. Lastly, average economic activity in March remained unchanged at February’s two-year high of 3.6%.

At its latest bimonthly meeting held on 22 May, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) decided to leave the 7-day repo reference rate unchanged at an all-time high of 40.00%. The decision was widely expected by market analysts, as the Bank tried to settle markets by restoring confidence following weeks of financial volatility and a sell-off of the currency in the past few weeks. The Argentine peso came under severe pressure due to growing expectations of faster-than-expected monetary policy normalization in the United States. The latest rate decision also came against a backdrop of double-digit inflation. According to the National Statistics Institute (INDEC), national consumer prices rose 2.7% over the previous month in April (March: +2.3% month-onmonth) on the back of cuts in government subsidies. National inflation ticked up from 25.4% in March to 25.5% in April. According to the Bank, the sharp depreciation of the Argentine peso observed in the first two weeks of May will contribute in fanning price pressures going forward and consequently Monetary Policy Rate | in % Note: 7-day Repo Reference Rate in %. Source: Central Bank of the Argentine Republic (Banco Central de la República Argentina). 22 26 30 34 38 42 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 % Inflation | Consumer Price Index Note: Annual and monthly var. of Buenos Aires consumer price index in %. Source: Statistical Institute of the City of Buenos Aires. 20 30 40 50 -4.0 0.0 4.0 8.0 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Month-on-month (left scale) Year-on-year (right scale) % % Consumer Confidence Note: Monthly consumer confidence index. Values above 50 indicate an optimistic assesment in consumer sentiment while values below 50 indicate a pessimistic assesment. Source: Universidad Torcuato di Tella (UTDT). 35 40 45 50 55 May-16 Nov-16 May-17 Nov-17 May-18 FOCUSECONOMICS Argentina LatinFocus Consensus Forecast | 24 June 2018 warrant tight monetary conditions. The Bank saw the current monetary stance as appropriate to impede a further sell-off of the peso and prevent a further depreciation, which would translate into higher inflation. The Central Bank reiterated its commitment to conducive monetary policy, with the objective of achieving the 15.0% inflation target by the end of the year. A timeframe, however, was not provided, and future rate decisions will depend on developments in financial markets. The BCRA also stressed its willingness to normalize monetary policy as financial turbulence and uncertainty dissipates. On average, Panelists participating in the LatinFocus Consensus Forecast see the 7-day repo repurchase rate ending 2018 at 31.38%. They see the 7-day repo repurchase rate easing further in 2019, closing the year at 23.24%.

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Splitting Up California is The Right Thing To Do... A proposal to split California into 3 states will be on November’s ball...

Splitting Up California is The Right Thing To Do

Splitting Up California is The Right Thing To Do...

A proposal to split California into 3 states will be on November’s ballot and I support this. While I do not work or live in California I do know the economic problems at hand. And that’s just the start of it. I have to admit I preferred Tim Draper’s idea of 6 California’s w/ San Francisco becoming a tax-free Monte Carlo type area...

But now...."NorCal" can sell water, wine and weed..."SoCal" can survive off taxing the masses, taxing the boarders, farming and ag....and "California" (which will include LA and Santa Barbara) can export Hollywood and tourism....

All kidding aside lets seriously think about this. Imagine if the state of Georgia encompassed South Carolina, North Carolina, Tennessee, Virginia and DC. Despite the fact that I have forever been an economic bear about what "California" is, there is no doubt the state is unmanageable and splitting with debt, over burdened with population (and a lack of housing), even saddled with environmental issues (while forest fires are generally not man made irregardless of the cause...they emit carbon). In San Fran there is so much trash in plain sight you have to wonder if city leadership understands basic health and human rights policy.  

“Three states will get us better infrastructure, better education and lower taxes,” Tim Draper, the Silicon Valley venture capitalist who sponsored the ballot measure, said in an email to The Times last summer when he formally submitted the proposal. “States will be more accountable to us and can cooperate and compete for citizens.” - LA TIMES

Many parts of Southern California should never have been settled. The water crisis alone is reason enough to support splitting the state into various chunks. It would be landmark if the state split but the movement is spreading and taking on different forms. 

And in the far north region of California, some residents have pushed to form a new state with parts of southern Oregon, and wouldn’t be keen on being lumped together with liberal San Francisco as envisioned by Draper’s map. - Bloomberg 

Economically speaking - off the cuff - San Fran, San Jose, LA and San Diego are classic - textbook - examples of housing bubbles. San Fran is such a fervent display of a housing bubble that people spend their entire career studying and researching the man made housing shortage. It is staggering that such housing shortage can happen in a mega-populated state - even when you break up California the population and economic numbers are among the largest in the US.

October 24, 2017
Initiative 17-0018 (Amdt. #1)
The Attorney General of California has prepared the following title and summary of the chief purpose and points of the proposed measure:
Divides California into three states subject to approval by Congress. Assigns each county to a new state. Upon passage, directs Governor to request that Congress grant approval within twelve months. If Congress approves, directs Legislature to divide California’s assets and liabilities between the new states. Provides that, if Legislature fails to act within twelve months of Congressional approval, debts shall be distributed among new states based on population relative to California population as a whole, and assets within boundaries of each new state shall become the assets of that new state. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Assuming this measure is approved by voters and the federal government and allowed by the courts, all tax collections and spending by the existing State of California would end. California’s existing state assets and liabilities would be divided among three new states. These states would make their own decisions about state and local taxes and spending. (17-0018.)

Map / Image Source: LA Times

Mounting geopolitical risks threaten MENA’s nascent economic recovery The Middle East and North Africa’s (MENA) region...

Mounting Geopolitical Risks Threaten Middle East Economic Recovery

Mounting geopolitical risks threaten MENA’s nascent economic recovery

The Middle East and North Africa’s (MENA) regional economy is gradually recovering from last year’s downturn. Oil-exporting economies are benefiting from the rise in oil prices, allowing some governments to boost spending and taking some pressure off financial markets. While higher oil prices are bad news for oil-importing economies, robust global economic dynamics are buttressing export growth, partially offsetting the deterioration of the current account. According to an estimate prepared by FocusEconomics, the MENA economy grew an aggregated 2.8% year-on-year in the January–March period (previously reported: +2.7% year-on-year), which would represent a noticeable improvement over the 1.0% rise in the October–December period of 2017.
Political developments have taken center stage in recent weeks, however, threatening to derail the region’s economic recovery. On 8 May, U.S. President Donald Trump decided to withdraw the U.S. from the Iran nuclear deal and reinstate economic sanctions against the country. While the memorandum signed by President Trump gives 180 days to re-impose all the sanctions, the U.S. administration wants some of the sanctions to come into force on 6 August. Iran has not yet abandoned the nuclear deal and is in talks with the remaining members of the Joint Comprehensive Plan of Action—China, the European Union and Russia—to reach a new accord. The European Union has already signed multi- billion U.S. dollar contracts with the Persian country, and if the U.S. administration goes ahead with its plan to punish all firms operating with Iran regardless of their nationality, it will likely worsen further the relationship between the U.S. and the EU. The consequences of the Trump administration’s decision could quickly spill over across the region. Iran has a vast network of allies in the Middle East, particularly Iraq, Lebanon, Syria and some Gulf Cooperation Council countries, that it could use to destabilize the region. Moreover, some countries such as Qatar and the UAE have strong economic ties with Iran and could be negatively affected by the secondary sanctions against firms operating with Iran. Oil prices have soared in recent months in the wake of increasing tensions between Iran and the U.S. and plummeting production in Venezuela, with prices hitting a level last seen in November 2014.

4 June 2018 that OPEC members and Russia were ready to increase output to rebalance the oil market. In the political arena, Lebanon is struggling to form a coalition government after Iran-backed Hezbollah and its allies won the 6 May general election. In Iraq, the 12 May general election was plagued with irregularities; on May 30, the electoral commission annulled votes cast at more than 1,000 of the country’s polling stations. While a repetition of the election is highly unlikely, disputes over the results will add additional strain to the negotiations to form a new coalition government and could generate social instability. In Jordan, Hani Al-Mulki resigned as prime minister on 4 June amid protests against the government over its ongoing economic reforms, including price hikes and a controversial income tax reform. Omar Razzaz, the former education minister, was put in charge by the king of forming a new cabinet. OUTLOOK | Geopolitical risks take their toll on MENA’s 2018 economic outlook The MENA region’s economy is experiencing a recovery this year largely due to higher oil prices, healthy global growth, relatively loose financial conditions and bolder fiscal support in key countries such as Qatar, Saudi Arabia and the UAE. Political risks, however, are gradually materializing, endangering the long-awaited economic rebound. The spat between Iran and the U.S. and its regional allies represents the main regional threat to the region’s economic outlook. The impact of the U.S. decision to abandon the Iran nuclear deal will be felt not only in the Persian country but also in other countries in the region such as Iraq and Lebanon. Moreover, social tensions are resurfacing in Egypt, Jordan and Morocco, while the long-standing conflict between Israel and Palestinians has flared up again in recent weeks. Elsewhere in the MENA region, the establishment of secure governments in Iraq and Lebanon is key to cementing political stability. The MENA regional economy is expected to expand 2.7% in 2018, which is down 0.1 percentage points from last month’s estimate. Our panel projects growth of 3.1% next year. This month’s downgrade for the 2018 economic outlook reflects lower growth prospects for Iran, Iraq, Kuwait, Lebanon and Qatar. Projections were left stable in Bahrain, Israel, Jordan, Morocco, Oman, Saudi Arabia, Tunisia, the UAE and Yemen. This month, Algeria and Egypt were the sole economies to receive upgrades for their 2018 GDP outlooks. Egypt’s economy is expected to be the top performer in 2018, followed by Israel’s. At the other end of the spectrum, Yemen, which is entangled in a bloody civil war, is expected to contract for the fifth consecutive year. Among other major economies, Saudi Arabia’s economy is expected to return to growth this year, but the expansion will be limited by reduced oil output in compliance with the global oil cut deal. Israel should continue to expand at a fast pace on strong private consumption and fixed investment growth.

SAUDI ARABIA | Non-oil economic activity falters in April The recent rise in oil prices, which are currently trading at levels last seen over three years ago, is allowing Saudi authorities to increase spending, particularly to fund social benefits and military outlays. Moreover, higher oil prices are boosting international reserves, which hit an over one-year high in April. That said, the gain will be partially offset by the reduction in oil output as countries participating in the OPEC oil deal continue to deliver high conformity levels (April: 152%). While the oil sector appears to be recovering, the non-hydrocarbon economy is slowing markedly this year. The implementation of the value added tax in January likely disrupted economic activity in Q1, while delayed payments to businesses are causing financial strain in some companies, particularly in the construction sector. The crackdown on corruption that affected princes, cabinet officials and businessmen in November 2017 and the Saudization policy have also contributed to diminishing economic sentiment. While the economy is expected to emerge from recession this year, the rebound will be rather limited. Saudi Arabia’s strong compliance with the oil cap deal is preventing the economy from fully benefitting from the recent spike in oil prices. Moreover, the country remains entangled in a never-ending war in Yemen, while regional geopolitical risks continue to rise. FocusEconomics Consensus Forecast panelists expect economic growth of 1.5% in 2018, which is unchanged from last month’s projection. In 2019, growth is seen picking up pace to 2.3%.

UAE | Economy gains steam in April as VAT impact fades The economy gained steam in the first quarter, largely thanks to higher oil price that buoyed the hydrocarbon sector, despite constrained output from the OPEC agreement. This welcome boost more than offset a slight slowdown in the non-oil economy, which had to adjust to the implementation of VAT in January. Looking at Q2, the VAT-induced slowdown is likely to subside, with PMI data showing an improvement in April, while oil prices dynamics still look positive following the U.S. exit from the Iran nuclear deal. Furthermore, on 20 May, the government approved a new 10-year visa to attract investors and skilled professionals, as part of its comprehensive strategy to modernize and diversify the economy away from oil. This should reinvigorate the residential housing market, which has been tumbling in past years. Investment should be the main driving force in the non-oil economy this year. A large infrastructure push from the government, particularly in Dubai in the run-up to the Expo 2020, should carry private investment momentum. In addition, a flurry of new measures including 10-year visas and a reform—to be introduced in Q4—authorizing 100% foreign ownership in some sectors are expected to boost FDI inflows further. Meanwhile, higher tourist inflows will likely buttress private consumption growth. An escalation of regional tensions could, however, put a lid on this positive momentum. FocusEconomics panelists expect GDP to increase 2.7% in 2018, which is unchanged from last month’s forecast, and 3.2% in 2019.

EGYPT | Economy set to complete a strong FY 2018 as reforms kick in With FY 2018 ending in June, the economy remains in good shape. Annual economic growth accelerated in the January-to- March period to reach a multi-year high. More recently, in May, foreign reserves hit a record monthly high and, in April, business conditions in the non-oil private sector were in positive territory for only the second time in over two years. Moreover, the gas industry got a boost on 10 May when a third production unit came online at the Zohr gas field. As part of its efforts to raise revenue and invigorate the stock market, the government announced on 28 May that it was floating some of a state-owned tobacco company on the Egyptian Exchange. Amid this positive backdrop, however, authorities have launched a crackdown on dissent following protests in May over higher metro fees. This apparent social tension underlines the careful balancing act facing the President Abdel Fattah el-Sisi: Continuing with IMF-backed structural reforms to the economy while minimizing the burden on Egyptians that are already financially-squeezed. In FY 2019, the economy should maintain its strength. Investment is likely to prove supportive, boosted by an improved regulatory environment—thanks in large part to several recent measures, such as new investment, bankruptcy and industrial licensing laws. In addition, the external sector will continue to benefit from the weaker pound. However, the high debt burden and sizeable budget deficit will continue to pose downside risks. FocusEconomics analysts expect GDP to expand 5.0% in FY 2019, which is unchanged from last month’s forecast, and 5.0% again in FY 2020.

ISRAEL | Growth remains robust in Q2 Despite a slight quarter-on-quarter moderation, economic activity remained robust in the first quarter chiefly on the back of strong private consumption and fixed investment. The external sector, however, dragged on economic growth in Q1; import growth was more than three times higher than export growth. Available data for Q2 suggests that momentum will remain robust. Economic activity picked up pace in April, while business sentiment and the manufacturing PMI remained elevated despite easing somewhat. The PMI remained in expansionary territory for the fifth consecutive month in April on the back of domestic demand. In addition, export data for February–April continued to point towards strong overseas demand for high-tech goods. The economy should be supported by fixed investment and private consumption this year. New projects such as the Leviathan gas field and ultra-loose monetary policy should buttress fixed investment, while household consumption will likely benefit from lower taxes. However, risks remain present in regional tensions that could dampen inbound tourism and investor sentiment, and drag on export growth. Moreover, the near full-employment level could create skill shortages, limiting output growth. FocusEconomics panelists forecast the economy to expand 3.4% in 2018, unchanged from last month’s forecast, and 3.3% in 2019.

INFLATION | Inflation stabilizes at low levels in April Price pressures in the Middle East and North Africa region remained subdued in April, with regional inflation stabilizing at March’s 3.7%, according to an aggregate produced by FocusEconomics. April’s result reflected lower inflation in Saudi Arabia as the impact of the VAT introduction in January fades, coupled with the ongoing deflationary process in Egypt. Despite the weakening of the Iranian rial following expectations of possible new economic sanctions by the U.S., inflation declined in April due to lower prices for food. This year, inflation will pick up on the back of faster economic growth in the region, the implementation of a VAT in some GCC countries and higher energy prices. FocusEconomics panelists forecast that regional inflation will average 5.1% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, inflation is expected to moderate to 4.7%.

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From Mizuho: In the Japan-US summit meeting on April 17-18, issues on North Korea and trade were the main topics. Concerning the trade is...

Japan: The Economy June 2018

From Mizuho: In the Japan-US summit meeting on April 17-18, issues on North Korea and trade were the main topics. Concerning the trade issue, the two leaders agreed to undertake new trade talks. 

US President Trump addressed the issue of America’s “massive trade deficit with Japan” and showed his determination to slash the deficit, but he did not come up with any specific demands to Japan. He also made no reference to the currency issue, another area of concern. 

While Japan’s Prime Minister Abe expressed his position that “the Trans-Pacific Partnership (TPP) is the best for the US and Japan,” President Trump rejected the idea of returning to the TPP without renegotiating the conditions and emphasized his preference for bilateral talks. The new trade negotiations with the US are expected to be challenging for Japan.

The Japan-US FTA and the US return to the TPP The possibility of initiating the Japan-US FTA talks has been rumored since the outset of the Trump administration. Speculation that the US would officially request Japan to start FTA talks emerged right before the summit meeting. One factor behind this speculation was the statement made by US Trade Representative Lighthizer at the Committee on Ways and Means in the House of Representative, where he said, “We have told Japan that we are interested in having a free trade agreement with them at the appropriate time.”15 Also, since the countries exempted from the US import restrictions on steel and aluminum products, effective from March 23, were either countries with a trade surplus with the US or countries currently negotiating FTAs, it strengthened the belief that the United States would ask Japan to start FTA negotiations in exchange for 11 The Nikkei, “Pressure grows on Japan again. President Trump says, ‘I won’t be cheated again,’” March 24, 2018. 12 USTR, 2018 Trade Policy Agenda and 2017 Annual Report of the President of the United States on the Trade Agreements Program, March 2018. 13 The Nikkei, “President Trump urges purchase of US defense equipment,” November 7, 2017. 14 U.S. Department of the Treasury, Office of International Affairs, Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, April 2018. 15 USTR, “Opening Statement of USTR Robert Lighthizer to the House Ways and Means Committee,” March 21, 2018. 6 exempting Japan from the additional import tariffs. 16 Furthermore, since the FTA renegotiations between the US and South Korea were concluded in favor of the US side, there were increasing concerns within Japan that Japan would be the next target.17 Meanwhile, concerning the possibility of the United States returning to the TPP, there has been no specific development after President Trump’s reference to the TPP at the World Economic Forum’s Annual Meeting (Davos conference) in January this year. But discussions on the TPP came under the spotlight again, triggered by President Trump, who instructed Robert Lighthizer, the US Trade Representative and Larry Kudlow, the director of the National Economic Council to examine the conditions for returning to the TPP, when he met with Republican senators on April 12. Nonetheless, President Trump has not changed the conditions of the United States returning to the TPP, as the US may return to the TPP “only if the TPP becomes a substantially better deal.” On the night of April 17, when the first day of the Japan-US summit meeting was coming to an end, President Trump tweeted, “While Japan and South Korea would like us to go back into the TPP, I don't like the deal for the United States. … Bilateral deals are far more efficient, profitable and better for OUR workers.”18 This suggested that the situation was far from hopeful that the US would return to the TPP talks. For Japan, which wanted to avoid Japan-US FTA talks but could not respond positively to renegotiating the TPP,19 it was believed that when asked by the United States to start the FTA negotiations, the best solution would be to conduct discussions within the Japan-US Economic Dialogue initiated with trade and investment as one of its main pillars. But as the two countries had already held the dialogue twice, and the US had begun to view Japan as using the dialogue to buy time, it was thought this option would be difficult for the two countries to take before the summit meeting. Under these circumstances, Japan prepared a new alternative to establish a new framework for dialogue. 20 During the summit meeting, the two leaders agreed to start “talks for free, fair, and reciprocal trade deals” between Japan’s Minister of State for Economic and Fiscal Policy 16 The Mainichi Shimbun, “US to exercise import barrier on steel; EU and South Korea exempted but not Japan,” March 23, 2018. In the Committee on Financial Affairs of the House of Councillors held on March 29, government witness Tsutomu Koizumi, Deputy Director-General / Deputy Assistant Minister of the Economic Affairs Bureau in the Ministry of Foreign Affairs, stated that “we should prudently take note of the fact that the US is using the exemption of certain countries from the import restrictions as a tool to proceed with trade talks with each country.” Following this statement, Finance Minister Taro Aso stated that “the most important thing is to avoid the situation where Japan will be drawn into bilateral negotiations in exchange for an exemption from import restrictions. … We will firmly reject this situation.” (The House of Councillors “the 196th Diet, record taken at the Committee on Financial Affairs, March 29, 2018, no. 8.”) 17 The Mainichi Shimbun, “The US-South Korea FTA – Japan feels threatened from pressure,” March 27, 2018. 18 Tweets by President Trump (@realDonaldTrump), April 18, 2018 11:49 (Japan time). It should be noted that although South Korea has not signed the TPP and CPTPP, it seems to be positive on joining them. 19 On this issue, refer to Junichi Sugawara, “Conclusion of TPP11 and its outlook,” Mizuho Insight, Mizuho Research Institute, February 15, 2018. 20 The Nikkei, “US and Japan to start new trade talks, the government will make a proposal at the summit meeting,” April 14, 2018. 7 and Minister in charge of Economic Revitalization Toshimitsu Motegi, who heads the TPP negotiations, and US Trade Representative Robert Lighthizer, who is responsible for trade negotiations. It was decided that details of the talks would be reported in the Japan-US Economic Dialogue.21 Japan made it clear that the new trade talks would not be a preliminary deliberation to a Japan-US FTA, and Prime Minister Abe expressed to President Trump that he has no intention to conclude a Japan-US FTA.22 But since President Trump has declared that a bilateral deal would be preferable, we cannot deny the possibility that the United States will try to persuade Japan to turn the new trade talks into Japan-US FTA negotiations.

From Zermatt Research:
While the outlook moderates, the economy lost steam in Q1. Analysts see a gradual recovery this year and next, with inflation staying near 2% from raw material and rising labor costs.

According to the Labour Force Survey and Mizuho Research, the number of employed persons in Japan FY2017 reached an all time high - or a historical high - of 65.57M. There has been a dramatic increase in female employment as well. Well, for starts Japan realized that last year (FY2017) the country reached a historical employment high — and that included record amounts of women entering the work force. The shift in numbers of females from part-time to full-time / regular employment in the welfare, medical and healthcare sectors will increase the average wage per worker too.

PMI in Japan, as well as Hong Kong, came in lower.