Credit Suisse Economic Outlook: Fed Likely to Raise Rates in June
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Credit Suisse Economic Outlook: Fed Likely to Raise Rates in June

The global economy remains robust. Nevertheless, the Fed is still the only major central bank that is tightening its monetary policy.

The world economy looks to be in very robust shape in the current quarter too; after a significant recovery in the last six months, however, global business confidence has stabilized at a high level. Headline inflation in many economies is likely to have peaked in the first quarter and should ease slightly over the coming months given that energy input prices are rising more slowly year-on-year.

Growth at Cruising Speed

More Than One Rate Hike Likely

The slow growth in US gross domestic product (GDP) in the first quarter once again confirmed the discrepancy between subdued "hard" economic data, on the one hand, and consistently strong sentiment indicators in the US since the start of the year, on the other. Therefore, we have good reason to assume that GDP growth accelerated in the second quarter, particularly given the fact that sluggish private consumption growth in the first quarter contrasted with robust labor market data and strong consumer confidence.

The US central bank (Fed) has already indicated that it considers the weakness in growth to be temporary. It therefore seems very likely that the Fed will raise key interest rates again at its meeting on June 14. Since we expect US growth to remain robust, with increasing shortages occurring in the labor market, we think the Fed will ratchet up interest rates again in September. Furthermore, in December it is likely to announce that as of next year it will no longer fully reinvest any bond redemptions in its securities portfolio automatically as it has done up to now.

Monetary Policy

Economic Recovery in Euro Zone Is Broadening Out

With political uncertainty in the euro zone having abated following the presidential elections in France, attention is turning to the robust recovery in many economies. Sentiment indicators point to considerable growth in economic activity and employment. This underpins the view that the self-sustaining positive cycle of employment growth, which is in turn supportive to further economic growth, could spread from Germany and Spain to France and Italy too.


This is likely to put upward pressure on core inflation in the euro zone over time, albeit only to a modest extent. Therefore, the European Central Bank (ECB) will probably take its time in adopting a more neutral stance over the coming months. We expect the ECB to announce in September that it will gradually reduce its bond purchases during 2018.

Deflation in Japan Leaves BoJ Little Room for Maneuver

Given the positive data on economic activity, the Japanese economy is likely to have picked up speed again in the first quarter. Though some slowdown appears likely in the second quarter, the outlook for the remainder of 2017 is still favorable. Inflation remains the weak point: It has again fallen below 0 percent, triggering a relatively dovish tone from the Bank of Japan (BoJ). The prospect of a move toward monetary policy normalization has therefore deteriorated, and a rise in the target yield for 10-year government bonds may not be possible until the beginning of 2018.

Stabilization in Emerging Markets Continues

After GDP growth in China proved higher than expected in the first quarter, weaker sentiment indicators suggest that growth in the second quarter could slow temporarily before stabilizing again. We therefore expect average growth of 6.7 percent year-on-year in 2017.

In Russia, the economic data has been improving for several months now. The situation remains fragile, however, which is likely to cause the central bank to loosen monetary policy again.

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