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Political turmoil and Chinese growth will set the agenda in Q3

Investor Brief: UK vote to leave the EU means further uncertainty going into the third quarter of this year.

The fallout from the UK’s Brexit vote, upcoming presidential elections in the US and slower growth in China could make for an eventful and challenging third quarter. Nevertheless, despite the political and financial market turmoil, Danske Invest’s chief analyst Bo Bejstrup Christensen does not expect Brexit to trigger a new global crisis.

“Given the shock the political uncertainty represents, we now expect Europe will slip into recession in the third quarter. However, we also expect growth to pick up again in spring 2017,” says Bo Bejstrup Christensen, who adds:

“The European Central Bank, the ECB, and the UK central bank, the Bank of England, will do whatever is necessary to ensure financial stability.”

US rate hike could be back on the table
While Europe is in turmoil, it is a different story across the Atlantic, where US growth has increased from roughly 1 pct. to hover around 2 pct. at present.

“While Europe’s turmoil may well create some unease in the very short term, our view is that the combined strength of the US housing market and the US bank system will be enough to push growth above 2 pct. in autumn 2016,” explains Bo Bejstrup Christensen.

He also expects to see both wage and price inflation in the quarter, which could put a US rate hike back on the table in the autumn.

Chinese growth losing steam
In the emerging markets, all eyes will be on China, where economic growth, which appeared to be stabilising in the second quarter, may begin to slow as government stimuli lose their effect.

“Maintaining growth levels in China requires further government stimulation, perhaps via additional infrastructure investment, or a continued easing of home loan requirements. Our view is that the authorities will not continue to stimulate the economy to the same extent, which is why we anticipate that both investment and housing market growth will decline in the third quarter,” says Bo Bejstrup Christensen.

If that happens, he estimates that both China and many other emerging market economies will slow. Bo Bejstrup Christensen is therefore sceptical about whether the impact of higher commodity prices and recent positive developments in the emerging markets generally will continue.

Read more in the Investor Brief
 

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