In the twice a year published Joint Economic Forecast by leading German institutes, growth projection for 2018 and 2019 were raised to 2.2% and 2.0% respectively. Both were upwardly revised by 0.2% from Autumn report. The released warned that while German economy “continues to boom”, “the air is getting thinner”. Still, “pace of economic expansion nevertheless remains brisk:” It pointed to upturn in the world economy, favorable situation in labor market and fiscal stimulus of the new coalition government as driving forces. Inflation is projected to slow to 1.7% in 2018 then rise again to 1.9% in 2019.
Global growth projection was revised up by 0.3% to 3.4% in 2018. The reported noted that “tax cuts in the USA will stimulate economic activity there, which may have a knock-on effect on other countries”. However, it also warned that the dynamic in the world economy will “gradually flatten off over the forecasting period”. And that’s partly due to “a harsher trade policy climate, which will burden global investments.”.
The report also pointed directly to the US announcement of steel and aluminum tariffs as “another step towards greater protectionism”. It warned that “any further escalation of the trade conflict will restrict international trade in goods and significantly damage world economic growth in the mid-term.” Even “mere discussion of such measures can increase uncertainty over a country’s future trade policy and weaken economic sentiment”.
A summary of the report can be found here. Or more details here.
Members of the Joint Economic Forecast Project Group
Deutsches Institut für Wirtschaftsforschung e.V. [www.diw.de]
in co-operation with:
The Austrian Institute of Economic Research WIFO [www.wifo.ac.at]
ifo Institute – Leibniz Institute for Economic Research at the University of Munich[www.ifo.de]
in co-operation with:
Swiss Institute of Business Cycle Research (KOF), ETH Zurich [www.kof.ethz.ch]
Institut für Weltwirtschaft an der Universität Kiel [www.ifw-kiel.de]
Halle Institute for Economic Research (IWH) [www.iwh-halle.de]
RWI – Leibniz-Institut für Wirtschaftsforschung [www.rwi-essen.de]
in co-operation with:
Institute for Advanced Studies, Vienna [www.ihs.ac.at]
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Chicago Fed Evans discussed overheating and monetary policy
Chicago Fed President Charles Evans delivered a speech at the University of Wisconsin today. There he laid down “three possibilities concerning low inflation and low unemployment and their implications for monetary policy”.
The first one being the “overheating story” and said that the “risks are not particularly high”. Evans pointed out that the so called “Phillips curve” is much “flatter” than it was. And, adding to that “inflation expectations low and well anchored, and a lack of fuel from strong wage growth”, there is no “outsized risk of a breakout in inflation”.
The second scenario is that “inflation is low because the sustainable rate of unemployment is actually much lower than the FOMC’s 4-1/2 percent estimate”. Therefore, “unemployment rate really isn’t putting any pressure on labor markets.” In this case, “the risks of overheating would be lower, and perhaps interest rate adjustments could be smaller.”
In the third scenario, “unemployment running below its natural rate, u*, without rising inflation is due to labor market inefficiencies that are outside the purview of monetary policy.” He added that
“let’s consider the possibility that unemployment remains low and some structural problem keeps wages and prices from rising to attract workers. Is this really a problem that monetary policy is suited to address? I think the answer is no.”
Finally, Evans also noted that Fed is facing “low inflation trends and low inflation expectations”. And, ” some cyclical upturn in inflation is actually welcome because it should help solidify expectations symmetrically around our 2 percent objective. This is necessary for achieving our inflation target on a sustainable basis.”
His full speech Overheating and Monetary Policy: How Does Low Inflation Affect the Policy Narrative?