DuckerFrontier recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition highlighting Federal Reserve policy changes and supply chain disruption in the Persian Gulf.
The Fed remains worried that the US economy may slow primarily due to weak external growth or an increase in restrictive trade measures, either of which could tip the economy into an investment-led growth contraction. The Fed also does not want to disappoint financial markets–which had fully priced in at least one Fed cut at this meeting–because financial market volatility can also lead to a pullback in business investment and consumer spending. Until the next Fed meeting in mid-September, economic data responding to this rate cut will be closely monitored, and the Fed will prepare to ease rates again if needed.
The second quarter GDP print confirms our US outlook. The US economy is expected to decelerate in 2019 and 2020, driven by lower investment, but consumer spending is expected to continue to show strong growth and provide opportunities for premiumization. This Fed cut simply adds additional some additional support to the economy by somewhat easing financial conditions, but most importantly, by signalling that the Fed will respond to any weakness in the data with additional monetary stimulus.
While the EU, Russia, and China pursue diplomatic efforts to save the nuclear deal, Iran will continue to demand deescalation and a return to the 2015 accord. Considering the upcoming US elections, all parties are likely to come back to the negotiating table within the next year. Although all parties want to avoid a direct conflict, rising tensions and a growing military presence are increasing the risk of unintended escalation towards more direct military confrontation.
Oil prices will likely remain stable due to oversupply in the global market unless direct military confrontation or an Iranian blockage of the Strait of Hormuz occurs. These scenarios both carry a low likelihood. However, supply chain disruptions through the Gulf, as well as potential volatility in demand from customers due to stockpiling, should be closely monitored.