24 June 2019

Global Economic Overview

Economics

Central banks change tack amidst economic “crosscurrents”

Global
While we continue to judge that another marked escalation in the US-China trade
dispute will be avoided, there is little evidence that a prompt de-escalation is
forthcoming either. Given that this is likely to see the external demand backdrop
remain subdued, we have downgraded our global growth forecasts to 3.2% for 2019
(prev. 3.3%) and 3.4% for 2020 (prev. 3.5%). We also judge that the balance of risks
lies squarely to the downside, though we now expect some support for global growth
to be derived from more accommodative monetary policy. Our central expectation is
that the forthcoming Osaka G20 Summit will help to stabilise the situation.

United States
There was a seismic shift in the Federal Open Market Committee’s ‘dot plot’ in June
with nearly half of participants now judging that rate cuts will be appropriate this year.
The change reflected concerns of “crosscurrents” in the global backdrop amidst
worries over the direction US-China trade relations were heading. Reflecting these
worries and the Fed’s apparent responsiveness to such factors, despite a relatively
solid domestic growth picture, we now judge that we will see a 25bp rate cut in
September (though it could be as soon as July), a repeat move in December and one
further reduction in 2020. Note that we expect growth momentum to be reinforced by
more supportive monetary policy acting as an offset to any overseas squeeze; as such
we still look for 2.6% GDP growth this year and a softening to 1.7% next.

Eurozone
Recent data has been partially consistent with the downside risks we had identified in
May, with Q2 growth certain to run below the +0.4% seen in Q1 amid the risk of small
contractions in Germany and Italy. In the face of weaker eurozone momentum and
continued elevated trade tensions, we have revised lower our growth forecasts to 1.2%
in 2019 (prev. 1.4%) and 1.5% in 2020 (prev. 1.7%). Note that we also now see the
ECB easing policy, though expect this to only be through guidance rather than cutting
rates and/or restarting QE. Subsequently, we expect the ECB to begin raising its
deposit rate from -0.40% in Q4 2020 (prev. Q1 2020). Although we have left our end-
2019 EUR:USD call unchanged at $1.15, we have nudged down our forecast for end-
2020 to $1.18 (previously $1.22) in light of this change in policy view.

United Kingdom
UK focused investors have their sights locked on the Conservative party leadership
race. The race is between current Foreign Secretary Jeremy Hunt and his predecessor Philip Shaw
+44 (0) 20 7597 4302
Boris Johnson (BoJo). All surveys (of Tory party voters) point to the race being Mr philip.shaw@investec.co.uk
Johnson’s to lose, though reports of his widely publicised rift with his partner remind Victoria Clarke
us that his loss is not an impossibility. If he is successful, critical questions for sterling +44 (0) 20 7597 5154
investors include how committed BoJo would be, faced with dealing with a no-deal Victoria.clarke@investec.co.uk
Brexit on 31 October. There are also questions over whether his success could rapidly George Brown
+44 (0) 20 7597 4886
be followed with a General Election. For now, we maintain our judgement that
george.brown@investec.co.uk
whomever takes control of the helm will be pushed into an extension and eventually a
Ryan Djajasaputra
deal through parliament. Our end-year forecasts are still $1.27 and 90.5p (vs the +44 (0) 20 7597 4039
EUR). ryan.djajasaputra@investec.co.uk

Readers in all geographies please refer to important disclosures and disclaimers at the back of the report.
Global
A resolution to the US-China trade Chart 1: Global growth looks likely to have slowed further over Q2#
dispute does not appear close, with
recent rhetoric from Beijing and
Washington suggesting each side is
digging in for the long haul. Resultantly,
global economic momentum looks set to
remain subdued over H2 (Chart 1). But an
upcoming meeting between the leaders of
the two superpowers at the G20 Summit
(28-29 June) should be taken as a
positive, not least because President
Trump had otherwise threatened to raise
tariffs ‘immediately’ on $300bn-$325bn of
Chinese imports. While these talks are
unlikely to yield immediate progress, even
a lukewarm tête-à-tête should provide
#We calculate the ‘Big 12’ as the 12 economies with the largest IMF PPP weights for 2018. These are China, US,
some modest near-term support for risk
India, Japan, Germany, Russia, Indonesia, Brazil, UK, France, Mexico, Italy. Source: IMF, IHS Markit, Investec
sentiment. But analysis by the IMF...

...illustrates why investors are set to Chart 2: IMF estimates of the hit to global growth from the tariffs announced and envisaged#
remain cautious; it calculates that the
combination of the tariffs announced as 0.0
% difference from baseline

well as those envisaged could subtract

-0.1
0.5% from global GDP in 2020 (Chart 2).
For perspective, the IMF calculates this -0.2
would amount to a loss of about $455bn, -0.3
a sum greater than the size of the South
African economy. Unsurprisingly, China is -0.4
projected to bear the brunt of this, having -0.5
already seen industrial production growth
slow to a more than 17-year low in May. -0.6
However on balance we judge that 2019 2020 2021 2022 2023 Long run
another marked escalation in the trade
dispute will be avoided. But at the same Tariffs implemented in 2018 Tariffs implemented in 2018 and envisaged in 2019
time we are eyeing the prospect of a more #Chart plots IMF estimate of the impact of tariffs imposed since 2018 as well as the additional impact from the recently
protracted standoff, which would see announced and envisaged tariffs between the US and China. “Announced” tariffs correspond to those imposed on
elevated levels of uncertainty persist for... $200bn of US imports, while “envisaged” tariffs are the possible tariffs on a further $267bn. Source: IMF

...longer. While this creates a further Chart 3: Our global growth forecast has been cut to 3.2% for 2019 and 3.4% for 2020
headwind for the Chinese economy, we
expect Beijing to implement further fiscal
and monetary easing to ensure that GDP
growth remains within the sacrosanct 6.0-
6.5% target range. As such, we still look
for China to expand 6.2% in 2019 and
6.0% in 2020. However we note that other
governments have neither the capacity
nor the capability of China to offset such
a deterioration in the external
environment. Consequently we have
downgraded our global growth forecasts
to 3.2% for 2019 (prev. 3.3%) and 3.4%
for 2020 (prev. 3.5%), with the balance of
risks lying squarely to the downside. Still,
Source: IMF, Investec
this should be mitigated somewhat by...

Page 2 | 24 June 2019 | Global Economic Overview

...more accommodative monetary policy. Chart 4: Market-implied paths for interest rates have turned downward-sloping#…
We now expect two 25bp rate cuts from
the Fed this year and one next (see US 3.00 Faded: Current
section). Meanwhile, we look for the RBA US: Upper bound of Fed funds target range
2.50 Dashed: 31 Mar 2019
to cut rates in Q3 and Q4 2019 in light of Dotted: 31 Dec 2018
its revised assessment on the amount of 2.00
spare capacity. Finally, our rate hike calls 1.50
for the BoE and the ECB have been 1.00 UK: Bank rate

%
pushed out further in 2020. However, we
still find our forecasts at odds with the 0.50
extent to which easing is priced in by 0.00
markets (Chart 4). Our differences largely -0.50
boil down to three factors; 1) that such Eurozone: ECB deposit rate
marked easing is not warranted by macro -1.00
fundamentals; 2) the low likelihood that 2016 2017 2018 2019 2020 2021 2022 2023
extreme downside risks will crystallise, #Curves are estimated using instantaneous forward overnight index swap rates. No adjustment is made for the spread
and; (3) our faith that the ‘Phillips curve’ between the curves and the respective policy rates. Source: Macrobond, Investec
relationship has shifted but not broken...

...down. Still, we will acknowledge our Chart 5: …resulting in a sharp rebound in equities (the S&P500 has regained all-time highs)
forecasts are vulnerable in the face of the
concerns voiced about stubbornly low
inflation by a number of central bankers,
particularly amid a possible change in
reaction functions (e.g. the Fed policy
framework review that could see adoption
of price level targeting). But our base case
is that the ECB will avoid cutting rates and
restarting asset purchases. Instead we
suspect that it will rely on forward
guidance and ‘jawboning’. Indeed this is
consistent with its past history of doing
just this to bring about desired
adjustments in financial conditions
without actually pulling policy levers (see
Source: Macrobond
eurozone section). But in any case, the
revisions to our global outlook mean...

... that we have adjusted our currency Chart 6: Sovereign bond markets have also been buoyed by talk of the ECB restarting QE
forecasts for this year and next. First, a
later start to the ECB’s tightening cycle
sees the euro end-2020 at $1.18 (prev.
$1.22), though we reaffirm our current
end-2019 target at $1.15. Meanwhile, a
combination of RBA cuts and persistent
trade tensions result in a softer near term
path for the Aussie Dollar (we see $0.67
end Q3, $0.69 by end Q4 2019 and $0.73
by Q4 2020 (prev. $0.72 end-2019 and
$0.75 end-2020). Note that we have also
lowered our expectations for 10-year
bond yields. We have cut our end-year
forecasts for Treasuries by 50bp to 2.00%
and for Bunds by 25bp to zero, although
Source: Macrobond
we still look for Gilts to yield 1.00%.

Page 3 | 24 June 2019 | Global Economic Overview

United States
The degree of monetary support we can Chart 7: Fed’s ‘dot plot’ view of the appropriate path for rates – a seismic shift in June…
expect from the Federal Open Market
Committee (FOMC) has been a critical 14 14
March 2019 ‘dot plot’ June 2019 ‘dot plot’
issue for investors over June. Fed Chair

Number of particpants seeing

Number of particpants seeing

12 12
Jay Powell added to expectations that
policy cuts would be forthcoming after the 10 10
18-19 June Fed meeting, amidst a 8 8

rates....

rates....
seismic shift in the ‘dot plot’ view (Chart 7) 6 6
of the appropriate path for the Federal 4 4
funds rate. The ‘median’ dot, pointed to 2 2
policy steady this year, followed by one
0 0
reduction next year, with a slowly rising
2019 2020 2021 2019 2020 2021
path for rates thereafter. But importantly,
eight (of 17) FOMC participants judged Rates lower Unchanged Rates higher Rates lower Unchanged Rates higher
that reductions were warranted this year.
In March, no participants had looked for
*The change is against the current Fed midpoint of 2.375% Source: Federal Reserve June ‘dot plot’, Investec
an easing so this was a big shift. The Fed
statement also removed ‘patience’ …

…with the new buzz phrase “act as Chart 8: Trump eyeing approval rating boost from tough trade talks
appropriate” to “sustain the expansion”.
Global “crosscurrents” had been a key
factor behind the Fed’s shift in view, with
trade war news noted as “an important
driver”. Here Chair Powell mentioned the
impending (28-29 June) G20 Summit, at
which Presidents Trump and Xi intend to
meet. Our best guess is that they will opt
to kick the can and avoid a potentially
dangerous escalation on 28-29 June, and
gradually rebuild their relationship
thereafter. This slow approach suits
President Trump, who appears
emboldened by his approval rating
amongst Republican voters, which he
sees having been strengthened by his Source: Gallup historical data.
trade stance. Chart 8 shows his rating…

…at almost 90%. Amidst small steps Chart 9: US economic momentum is easing – but the domestic economy is not flashing red…
forward in the relationship, it is likely to
take some time for a hard deal to be
The CBLI index has trended lower, but remains in positive territory.
struck. As such we no longer see steady
policy this year; our best guess is that we
will see a 25bp funds rate cut in
September (though it could be as soon as
July) and a repeat move in December too,
followed by one further 2020 cut. There
are parallels with the policy deliberations
underpinning the 1998 precautionary rate
cuts (three in H2 1998), where the focus
was also on the international backdrop
(amidst a relatively solid domestic
backdrop, Chart 9). In 1998 the Fed was
also persuaded to ease amidst a clear
tightening in financial conditions. This is The grey area represents periods of recession, as defined by the NBER. Conference Board’s Leading Index which
not the case at present with the Chicago weights together 10 indicators. Chart 12 shows it has, prior to seven of the last 8 recessions, fallen negative
Fed’s Financial Conditions index … Source: Macrobond

Page 4 | 24 June 2019 | Global Economic Overview

…having budged very little over recent Chart 10: Access to quality labour as big an issue* as it was in the late-90s/early 00s…
months. Chair Powell’s reluctance to jump
Single most important problem for small businesses.
in and ease immediately may be
reinforced, not just by the imminent G20,
which could provide some clarity on risks,
but also by post-1998 lessons, where rate
reductions were soon followed with rises
(175bp from June 1999 to May 2000) as
the Fed returned to worrying about the
threat of rising inflation. At present, the
Fed’s focus is on low inflation as it expects
PCE inflation at just 1.5% at the end of
2019. But over a longer period, amidst
what looks to be a broadly solid domestic
backdrop there are plenty of signs of
hiring difficulties, which might just be
* Relative to the other categories listed. Source: NFIB, Macrobond
persuading the Fed to drag its heels a little
longer. Indeed Chart 10 shows that…

…access to quality labour for small firms Chart 11: With markets pricing for rate cuts, could housing receive yet more support?
is now as big an issue as it was in the late-
90s/early-00s. And the Fed’s Beige Book
is littered with evidence of hiring
difficulties. If the Fed opts to take a little
time in the near term, whilst it waits for
further news on “crosscurrents” and trade
developments, it will at least likely have
the benefit of market interest rate pricing
doing some of the leg work in providing a
supportive footing to the economy;
current bets are there will be around
75bps of loosening this year. Those
expectations will, for example, reinforce
housing sector support, with lower 30-
year bond yields pushing down mortgage
Source: Macrobond
rates, helping to drive a pick-up in
mortgage applications...

…since the start of 2019 (Chart 11). Chart 12: Greater focus on the slow return of inflation to 2% is adding to the easing bias…
Earlier in June, academics, central
bankers and community representatives
There is now greater focus on inflation “lingering” and “not getting
met at the Chicago Fed to discuss ideas
back up to target in a sustainable way”. [J. Powell, 19 June 2019].
and evidence related to Federal Reserve
Board Vice Chair Richard Clarida’s review
of the Fed’s policy framework and
communications. Importantly, the
gathering has focused minds on the slow
return of inflation to target, something
Chair Powell flagged in his post-June
FOMC meeting comments. The review
lasts a year or longer, but already looks to
be influencing appetite to ease. This
reinforces our revised view that US rates
will head lower. And with ideas from the Source: Macrobond
Clarida review spreading, it also looks to
be fuelling similar discussions overseas, F
not least at the ECB.

Page 5 | 24 June 2019 | Global Economic Overview

Eurozone
Much of the recent data has been Chart 13: Industrial production off to a weak start in Q2 (% change)
consistent with a partial realisation of the
downside risks we wrote about last
month. Industrial production declined by
0.5% in April and there has only been one
monthly increase since last September,
albeit a giant 2.0% leap in January. In
Germany there was a fall (ex-
construction) of 2.3%, after a brighter
March. The manufacturing PMI has been
languishing below the 50 level all year –
June’s flash data showed close to no
improvement at 47.8. Anecdotal evidence
suggests that conditions in the Euro area
manufacturing space remain extremely
challenging. A lack of at least modest
Source: Macrobond
progress between Washington and
Beijing would of course exacerbate this.

The wider economy is faring a little better, Chart 14: Market-based inflation expectations have recovered slightly (5y5y inflation swap)
but Q2 GDP will undoubtedly run below
Q1’s +0.4% (qoq), especially as Germany 1.65
and Italy risk small contractions. Labour
markets are still tightening. The Euro area 1.55
wide unemployment rate slipped to 7.6%
in April, its lowest level since August 1.45
2008; the job vacancy rate continues to 1.35
%

rise; and annual wage growth reached

2.5% in Q1, its firmest pace for 9½ years. 1.25
But these trends have yet to translate into
higher inflation – May’s core HICP rate 1.15 Record low of 1.077% before ECB
was 0.8% and this has consistently run President Mario Draghi’s speech in Sintra
1.05
below the effective 1.9% target since late-
Jan Feb Mar Apr May Jun
2008. With global trade frictions
threatening demand, 5y5y inflation
Source: Bloomberg
expectations temporarily hit an all-time
low of 1.08%, earlier this month.

But markets were rocked (Charts 14 & 15) Chart 15: Change in 10-year eurozone government bond yields since the start of the year
when Mario Draghi stated last week that if
the sustained return of inflation were
threatened, additional stimulus would be
required; that rates could come down
further; and there was still headroom to
restart QE. We suspect the ECB aims to
‘provide guidance’ without taking such
action (similar to announcing OMTs
(Outright Monetary Transactions) in 2012
without deploying them). Also our central
case is that the ECB will begin to raise its
deposit rate from -0.40% in Q4 next year.
But without a prompt rebound in activity,
the ECB’s policy direction is set to be very
different. And the success or otherwise of
Source: Macrobond
the Trump/Xi meeting will be instrumental
in determining if rates come down again.

Page 6 | 24 June 2019 | Global Economic Overview

Governing Council members insist that Chart 16: Several euro member states are near the 33% issuer limit for QE
there is a sufficient stock of bonds to
restart asset purchases, if necessary. A 35%
biting constraint could be that ECB 30% 33% limit
purchases are restricted to 33% of 25%
issuance. Chart 16 shows the current 20%
proportion of each sovereign’s issuance,

8.8%
15%
showing that it is above 25% in eight
cases. Over time the number of eligible 10%

32.6%
31.4%
29.0%
28.8%
28.7%
25.8%
25.8%
25.4%
24.2%
24.1%
23.9%
23.8%
22.8%
21.4%
21.3%
18.5%

0.0%
bonds should rise as budget deficits mean 5%
that there is net issuance in most 0%
countries. But we would not expect much.

Slovenia

Finland
Luxembourg

Ireland
Netherlands

Cyprus
Latvia
Italy

Belgium

Estonia
Spain

Germany
Slovakia

Malta
Austria

France
Portugal

Lithuania
The zone as a whole is set to record a
budget deficit of below 1% of GDP this
year and next, while Germany should be
in surplus. Without tweaking the rules this
Source: ECB
could restrict the pace of any purchases.

Rome remains on a collision course with Chart 17: Italian deficit projections by vintage (% of GDP, headline (not structural) numbers)
Brussels over its fiscal stance, with an
ever present threat of being cast into the 4.0%
EU’s Excessive Deficit Procedure (EDP). 3.5% Significant gap between
European Commission (EC) forecasts 3.0% the latest EC forecasts
show Italy’s debt to GDP hitting 135% in 2.5% and Italy’s budget plan
2020. Also, it recorded a rise in its 2.0%
‘structural’ budget deficit in 2018 (to 2.2% 1.5%
of GDP from 2.1%) and the EC forecasts 1.0%
this to rise to 3.6% next year. Deputy PM 0.5%
Salvini is still aiming for tax cuts and there 0.0%
is still talk of issuing so-called ‘mini-BoTs’. 2017 2018 2019 2020 2021
Being in the EDP is not a disaster – 26 of Historic Stability Programme (April 2018)
the 28 EU countries have been there and Draft Budgetary plan (Oct 2018) Revised Budgetary plan (Nov 2018)
Italy may well escape. But continued Updated budget plan (Dec 2018) EC Spring forecasts (May 2019)
conflict and economic instability could
Source: European Commission
contribute towards investor perceptions of
a greater risk of Italy leaving the EU.

The euro has made gains against the Chart 18: We have lowered our forecast profile for the euro versus both the dollar and sterling
dollar to around $1.14 compared with
lows of close to $1.11 a month ago. In fact 1.25 0.92
this broadly summarises the range of the
currency pair over Q2 as a whole, with 1.20 0.90
both the ECB and the Fed seemingly 1.15
netting each other off in terms of setting 0.88
out prospects of easier policy. This is also 1.10
the rationale behind keeping our 1.05 Faded line: Current forecast 0.86
EUR:USD call unchanged at $1.15 for Diamonds: Previous forecast
end-2019. That said, we have nudged 1.00 0.84
down our call for end-2020, though we still Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
look for modest EUR strength, to $1.18
(previously $1.22). As stated above, our 2017 2018 2019 2020
call is that the ECB’s easing is limited to EUR:USD, lhs EUR:GBP, rhs
guidance, rather than cutting rates and/or
Source: Macrobond, Investec forecasts
restarting QE. Whether this turns out to be
the case looks set to be a defining factor.

Page 7 | 24 June 2019 | Global Economic Overview

United Kingdom
Former Foreign Secretary Boris Johnson Chart 19: Westminster arithmetic is complicated and challenging
(BoJo) is now into the last two in the Tory
Party leadership race, facing current
Foreign Secretary Jeremy Hunt. BoJo’s
popularity across party members (who
decide between the final pair) is such that
he is 2/9 favourite, despite reports of his
involvement in a recent domestic fracas.
While he has rowed back on his apparent
indifference on whether the UK leaves the
EU with or without a deal, he still insists
that Britain must exit on 31 October come
what may, a prospect unsettling markets.
The new PM will not just determine Brexit
policy, but also chooses the new
Chancellor, who will appoint the new BoE
Governor to replace Mark Carney who Notes: Government effective majority 4 (with DUP). By-election due (successful recall petition of a Tory MP – this
leaves the central bank on 31 January seat is listed as vacant above.) Majority estimate excludes abstentionist Sinn Féin, the Speaker and deputies.
next year. Whoever takes over at 10… Source: UK Parliament data, Investec

…Downing St faces a demanding Chart 20: Vote shares (%) amidst UK parties in the 2019 European Parliamentary elections
balancing act. With DUP support, the
Conservatives’ majority is now just 4 and
even the help of two sympathetic UKIP
independents would only raise this to 8 Change UK
(Chart 19). The Brexit Party came top at Plaid Cymru
last month’s European Parliament SNP
elections, with the Tories coming a dismal
Conservative
fifth, behind the Greens, (Chart 20). As
well as delivering Brexit to recover votes Green Party
from the Brexit Party, the new PM also Labour
needs to placate pro-European Tories, or Liberal Democrats
face further defections and ultimately Brexit party
perhaps, a General Election. A six month
extension to Britain’s EU membership 0 5 10 15 20 25 30 35
remains our central case. But as we
Source: BBC
warned last month, the risks of a no-deal
Brexit and an early election have risen.

Sterling has taken these risks on board. Chart 21: GBP at-the-money volatility curves – 31 October is pivotal…
This is clear looking at options markets,
where implied volatility remains
historically low for short maturities, but 10.5 Longer-term vols have risen on
has risen for those further out, with 31 31 Oct related fears (short-term
9.5
October acting as a pivot point (Chart 21). vols are high thanks to G20)
Put/call option price skew has risen (in 8.5
favour of puts), signalling market
concerns over potential selling pressure. 7.5
We remain nervous in the short-term,
given certainty is in short supply. But we 6.5
suspect the new PM will be able to use 5.5
political capital to get an extension and
ON 1W 2W 3W 1M 2M 3M 4M 6M 9M 1Y
eventually a deal through parliament. Our
end-year forecasts are still $1.27 and 24-Jun-19 24-Apr-19
90.5p (vs the EUR).
Source: Bloomberg, Investec

Page 8 | 24 June 2019 | Global Economic Overview

Economic news has been dismal over the Chart 22: UK GDP – industrial sector disruptions led monthly GDP sharply lower in April.
past four weeks. While Q1 GDP rose by
0.5%, it contracted by 0.4% (on the GDP -0.4% mom in April.
month) in April, after a 0.1% retracement
in March. Here the effects of an end to
rapid (no-deal, Brexit precautionary)
stockbuilding was intensified by various
car production shutdowns (also related to
Brexit) which sliced 24% off vehicle output
and 0.2% from GDP. The good news is
that this should recover in May (and also
spike temporarily in July, when seasonal
adjustment tries to compensate for a halt
that happened earlier in the year). The
bad news is that taken together the
numbers justify a downgrade to our GDP
Source: Macrobond, ONS
forecast for this year to 1.4% from 1.6%.

The broader dimension of course is the Chart 23: UK interest rate expectations – the curve now slopes downwards in late-19 & 2020.
stand-off between the US and China on
trade. While our baseline case sees some 1.20
easing in trade frictions, the downside 1.00
risks from an externally led slowdown are
crystal clear. Indeed the short-term UK 0.80
yield curve now slopes downward to the
%

extent that it is currently pricing in a near 0.60

50% chance of a cut in rates by summer 0.40
2020 (Chart 23). The MPC left its policy
stance on hold this month and made few 0.20
references to possible easing. Indeed
Jul-19
Oct-19
Jan-20

Jan-21
Apr-20
Jul-20
Oct-20

Apr-21
Jul-21
Oct-21
Jan-22
Apr-22
Jul-22
Oct-22
Jan-23
Apr-23
Jul-23
Oct-23
Jan-24
barring a no-deal Brexit, we do not see the
MPC bringing rates down. Our expected
hike timing remains Q4 next year, when Current 31/03/2019
(we hope) the coast should be clearer on
Source: Macrobond, Investec
both the internal economy and Brexit.

Digressing from Brexit and global Chart 24: UK industrial robotics installations lagged those of peers in 2017.
economic matters, we return to another of
our favourite topics i.e. productivity. Over
Units per 10000 employees

800
the past year, output per hour worked has 700 The UK ranks 22nd worldwide with a density of 85 units per
stagnated and since 2010, has risen by an 600 10,000 employees.
average of just 0.4% per annum. We 500
ascribe this to a number of reasons, 400
including a low level of investment. 300
Indeed although business investment 200
recorded a small rise in Q1 (in real terms), 100
0
it remains 1.4% below year earlier levels.
Supporting evidence comes from a recent
study by the International Federation of
Robotics. This showed that UK industrial
robot installations fell by 3% in 2017 and
that in terms of installed robots per
Source: International Federation of Robotics (IFR), Investec
employee, the UK is in 22nd place at
0.85%, in line with the global average, but
way below its peer group.

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Page 11 | 24 June 2019 | Global Economic Overview

 Global Forecasts

GDP Growth (%)

Global US Japan China UK EU19 Germany France Italy
2014 3.6 2.5 0.3 7.3 2.9 1.4 2.2 1.0 0.2
2015 3.4 2.9 1.3 6.9 2.3 2.0 1.5 1.0 0.8
2016 3.4 1.6 0.6 6.7 1.8 1.9 2.2 1.1 1.2
2017 3.8 2.2 1.9 6.8 1.8 2.5 2.5 2.3 1.8
2018 3.6 2.9 0.8 6.6 1.4 1.8 1.5 1.6 0.7
2019 3.2 2.6 0.7 6.2 1.4 1.2 0.7 1.3 0.1
2020 3.4 1.7 0.6 6.0 1.6 1.5 1.4 1.4 0.7
Source: IMF, Macrobond, Investec forecasts

Key Official Interest rates (%, end quarter): 10-year government bond yields (%, end quarter):
Eurozone
US Eurozone UK Bank Australia
deposit US Germany UK
Fed funds refi rate rate cash rate
rate
Current 2.25-2.50 0.00 -0.40 0.75 1.25 Current 2.03 -0.31 0.81

2019 2019
Q1 2.25-2.50 0.00 -0.40 0.75 1.50 Q2 2.00 -0.25 0.75
Q2 2.25-2.50 0.00 -0.40 0.75 1.25 Q4 2.00 0.00 1.00
Q3 2.00-2.25 0.00 -0.40 0.75 1.00
Q4 1.75-2.00 0.00 -0.40 0.75 0.75 2020
Q2 2.00 0.00 1.00
2020 Q4 2.25 0.25 1.25
Q1 1.50-1.75 0.00 -0.40 0.75 0.75 Source: Refinitiv, Investec
Q2 1.50-1.75 0.00 -0.40 0.75 0.75
Q3 1.50-1.75 0.00 -0.40 0.75 0.75
Q4 1.50-1.75 0.00 -0.20 1.00 0.75

ECB asset purchases ceased at the end of 2018. The Fed’s current maximum
monthly pace of QE roll off stands at $35bn. Run-off ceases at the end of
September. Source: Macrobond, Investec

FX rates (end quarter/ annual averages)

Current 2019 2020 2018 2019 2020
26-Jun Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 average average average
Euro €:$ 1.139 1.12 1.13 1.13 1.15 1.16 1.16 1.18 1.18 1.18 1.13 1.17
Sterling €:£ 0.894 0.862 0.895 0.910 0.905 0.910 0.880 0.880 0.880 0.88 0.89 0.89
(£:€) 1.119 1.16 1.12 1.10 1.10 1.10 1.14 1.14 1.14 1.13 1.12 1.12
£:$ 1.275 1.30 1.26 1.24 1.27 1.27 1.32 1.34 1.34 1.33 1.27 1.31
Yen $ 107.3 111 108 108 108 106 106 105 104 110 109 106
€ 122.3 124 122 122 124 123 123 124 123 130 123 123
£ 136.9 144 136 134 137 135 140 141 139 147 139 138
Aussie Dollar $ 0.695 0.71 0.68 0.67 0.69 0.70 0.71 0.73 0.73 0.75 0.69 0.71
€:AUD 1.639 1.58 1.65 1.69 1.67 1.66 1.63 1.62 1.62 1.58 1.64 1.64
¥ 74.6 78.6 73.4 72.4 74.5 74.2 75.3 76.7 75.9 82.5 75.2 75.3
£:AUD 1.835 1.83 1.85 1.85 1.84 1.82 1.86 1.84 1.84 1.79 1.84 1.84
Swiss Franc € 1.11 1.12 1.12 1.12 1.13 1.15 1.16 1.18 1.20 1.16 1.12 1.16
$ 0.975 1.00 1.00 0.99 0.98 0.99 1.00 1.00 1.02 0.98 0.99 1.00
£ 1.243 1.30 1.25 1.23 1.25 1.26 1.32 1.34 1.36 1.31 1.26 1.31
Source: Refinitiv, Investec

Page 12 | 24 June 2019 | Global Economic Overview