International Economic Week In Review: More Expansion Coming

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Includes: ADRU, DBEU, DBEZ, DBJP, DBUK, DEWJ, DEZU, DXJ, DXPS, EEA, EPV, EURL, EWJ, EWU, EWUS, EWV, EZJ, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, FJP, FKU, FXJP, GSEU, GSJY, HEDJ, HEWJ, HEWU, HEZU, HFEZ, HFXE, HFXJ, HGEU, HGJP, HJPX, IEUR, IEV, JEQ, JPN, JPNH, JPNL, JPXN, PTEU, QGBR, RFEU, SBEU, UPV, VGK
by: Hale Stewart

It's been a difficult few years for trade deals. First came Brexit, which was a surprising rebuke to the EU, and then came Trump's election, which was partially based on a rejection of most U.S. trade deals. However, the negative impact of trade deals has been overblown. Consider the following from Larry Summers:

But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreement.

American tariffs on Mexican goods, for example, averaged about 4 per cent before Nafta came into force. China had what was then called "most favoured nation" trading status with the US before its accession to the World Trade Organization and received the same access as other countries. Before the Korea Free Trade Agreement, US tariffs on Korea averaged a paltry 2.8 per cent.

Brad Delong made a similar argument published on Vox. Both make a very convincing argument. Unfortunately, both also rely on nuanced reasoning, which is lost in the current political climate. Moreover, the anti-trade backlash could have negative implications for global growth over the next few years if protectionist tendencies become ingrained in political discourse and tax structures.

EU news offered conflicting signals for the ECB. The Markit composite number rose 1.6 points to 56, the highest reading in 70 months. The manufacturing and service indices, which were 55.5 and 55.6, respectively, were also at multi-year highs. This continues the recent trend of the Markit numbers pointing to stronger EU growth. But higher growth leads to higher prices. The Markit report's price component was the highest since 5/11. The latest inflation reading, with a 1.8% Y/Y rate, confirmed this increase. The primary cause is the rise in commodity prices. Energy prices are normalizing: they increased 8.1% Y/Y. Unprocessed food prices increased 3.5%. The following table from the report highlights these increases:

Inflation is hardly out of control. Instead, it appears overall price pressures - like energy numbers - are returning to normal levels. But these increases could potentially increase pressure on the ECB to cut back on its asset purchase program prematurely.

The UK's second estimate of GDP was strong, with a very positive 1.8% headline number. Household spending increased 3.1%; 75% of production sectors grew, while all 4 service sectors expanded. Trade added to growth as well, which the following graph depicts:

This latest quarter's growth is in line with recent numbers:

The UK economy continues to show signs of life, in stark contravention of pre-Brexit predictions for a contraction.

News from Japan continued to show increased growth potential. The Markit manufacturing index rose to 53.5 - a 35-month high. The internals were strong; all sub-indexes grew at a faster rate. The leading index rose 1.9, printing its strongest reading in 12 months. Although the coincident number decreased .3, it is still near a 12-month high:

The international news continues pointing toward expansion. The EU is growing at a slightly faster rate, the UK has avoided the potential negative impact from Brexit and Japanese news points support continued growth projections.

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