In this Issue:

Healthy Backdrop for Consumers and Corporates Underpins Solid but Modest Growth
The backdrop for the US economy looks healthy, in our view, as consumers continue to spend robustly and companies increase investment. The strength of the labor market, allied with rises in the stock market and in housing, provide further potential support for consumer spending. However, in the absence of catalysts for an acceleration of growth, we think the rate of expansion is likely to remain around current modest levels. The lack of pricing power affecting both companies and labor is evident in weak inflation and wage growth data, a trend also evident in many other countries, suggesting it may endure for some time.

Asian Economies’ Performance Indicative of Improved Global Economic Growth
The relatively strong performance of Japan and China, Asia’s two largest economies, underlines the more positive picture in large parts of the global economy so far in 2017, even if the overall level of growth is steady rather than elevated. Against this background, we think that the divergences in the monetary policies of the major economies are likely to become more apparent, which could increase pressure on some central banks and magnify market volatility.

Eurozone Data Strong but ECB Keeps Monetary Policy Unchanged
We believe an adjustment in the European Central Bank’s (ECB’s) monetary-policy settings looks likely to be made soon, as it would be surprising if the central bank continued on its current highly accommodative course for much longer, considering the stronger-than-expected recovery in the eurozone economy. But our view is that the start of any tapering of the ECB’s bond purchases is likely to be delayed until 2018, and would perhaps be more gradually implemented than is widely expected, until policymakers can be more confident that inflation will return and remain close to their target of around 2%.



Healthy Backdrop for Consumers and Corporates Underpins Solid but Modest Growth

The backdrop for the US economy looks healthy, in our view, as consumers continue to spend robustly and companies increase investment. The strength of the labor market, allied to rises in the stock market and in housing, provide further potential support for consumer spending. However, in the absence of catalysts for an acceleration of growth—for example, the introduction of a comprehensive package of tax reforms—we think the rate of expansion is likely to remain around current modest levels. The lack of pricing power affecting both companies and labor is evident in weak inflation and wage growth data, a trend also evident in many other countries, suggesting it may endure for some time. As a result, we believe the Fed’s ultimate target for interest rates when normalizing monetary policy could remain relatively low, unless pricing pressures that are more typical of previous late-cycle economic expansions start to emerge.

Figures for the second quarter of 2017 showed that the economy grew at an annualized rate of 2.6%, more or less in line with consensus expectations. Consumer spending rose by 2.8%, driven by expenditure on durables (despite previous data suggesting weakness in auto sales over the quarter), which made up for more modest spending on services. Business investment remained elevated, while inventories and trade only had a limited impact. Though the overall second-quarter performance marked a healthy pickup from the tepid 1.2% figure seen in the first quarter, the average growth rate over the first half of 2017 showed little sign of breaking out from the modest trend of roughly 2% seen in recent years.