Global Macro Weekly Digest (Issue 82):Global reflation trend update,halted,continuing,or diverging

Since mid-late 2016, the global economy embarked on the reflation trend that has constituted a simultaneous rise in output growth and a rebound in inflation as commodity prices have recovered from their 2014-15 slump. However, such a reflation trend seems to have paused in recent weeks, with inflation and inflation expectations in major economies decreasing.

    Basically, we see two key factors behind this dampened outlook: 1) the recent weakness and uncertainty in crude oil price; 2) the policy uncertainties under Trump administration. But in our view, the recent setbacks do not necessarily mean a halt to the reflation trend, but just a moderated momentum.

    For the oil price, we expect the OPEC to extend its output cuts for another 6-9 months in their meeting this Thursday (May 25th), which will at least support the price to stay above USD 50/barrel for the rest of this year; and a stabilized oil price could at least partially lock up the downside of headline inflations.

    For the US policy uncertainties, we see distant possibility that Trump will be impeached. With that said, the delay in fiscal stimulus could be unavoidable, and will dampen expectations. But in our view, unless the impeachment becomes very likely, the impact on real economic activities should be limited.