Declining forecasts in the United States

The latest statistics confirm our view that the US economy has slowed to a GDP growth rate of about 1.8% in the third quarter, which is about its potential. We expect it to stay at this level in the fourth quarter. Although the figures published in recent weeks have been rather mixed, the financial markets have responded well overall as their expectations have been revised downwards, as shown also by the growth projections of the consensus, which converged on our own estimates, relatively conservative. Investors also appreciated the more conciliatory tone adopted in the Sino-US trade clash (resumption of talks, postponement of higher tariffs). We still doubt, however, that the most difficult issues of this conflict can progress much. The morale of the manufacturing industry remains very low and household confidence has not improved in parallel with the rise of the stock market. Other surveys show improvements, in particular the ISM non-manufacturing index, but without so far leading to a recovery in hiring. Employment growth has stabilized at around 150,000 per month, close to the 115,000 mark that prevents the unemployment rate from rising.

The underlying annual inflation
will surely progress until the first quarter of 2020.

We knew that core inflation would rise in the second half, but the latest figures have shattered our expectations. Over the past three months, the seasonally adjusted index has grown by 3.4% year-on-year, the last seen since 2006. Part of this is the backlash of past weaknesses that should not be extrapolated. Underlying and published annual inflation (also driven by new tariffs) will surely increase until the first quarter of 2020.

On the road to legislative elections in the United Kingdom?

Parliament's spectacular takeover of the Brexit has reinforced our view that the United Kingdom is moving towards a further extension of the exit deadline, with legislative elections in the fourth quarter. The likelihood of an agreement before October 31 seems rather slim in the absence of a convincing solution to the problem of the Irish border and knowing that the bill tabled by the deputies paralyze the ability to negotiate Boris Johnson. An exit without agreement on October 31 is very unlikely in our opinion.

Inflationary pressures of rising oil prices
and the acceleration of wage growth remain present.

The popularity of Boris Johnson took advantage of the disagreement between the government and Parliament, with a conservative party leading the polls. In the event of legislative elections, and if conservative and Brexit party choose to work together on an exit without agreement in the face of a rather fragmented opposition, this option remains open. Paradoxically, a credible threat of "no deal" would increase the chances of a positive outcome since the agreement would remain the preferred solution on both sides of the Channel. As we currently attribute a probability of approximately 45% to the exit without agreement, all our forecasts are based on a positive scenario. This heavy uncertainty will nevertheless continue to weigh on the economic performance of the United Kingdom.

August's inflation was far from expectations, as widespread weakness in all components pushed total inflation to 1.7%. We believe, however, that it will return to the target in the coming months as inflationary pressures such as rising oil prices and accelerating wage growth remain. In fact, wage growth reached a cyclical peak of 4% due to a surprisingly tense labor market.