The recent escalation of tensions between the US and North Korea has caused the Vix “fear gauge” to reach its highest level this year, but it remains a long way below the levels it reached during many previous shocks. Unless the tensions escalate drastically, they should not affect global economic prospects. We expect economic growth in the US to be around 2½-3% annualised in the second half of the year, and only a little less in the euro-zone. Meanwhile, inflation has remained weak, particularly in the US and Japan. With the US unemployment rate set to fall further, average earnings growth should pick up. The Fed is on track to begin shrinking its balance sheet in the coming weeks, and to raise rates again in December. Meanwhile, we expect the ECB to wind down its asset purchases next year, though it will probably not set out the details of its taper plans until October, at the earliest.
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