People take photographs as they watch the Spectra light and water show at the Marina Bay waterfront at night in Singapore. (Photographer: Ore Huiying/Bloomberg)

What Happened in the World Economy This Week and What It Means

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The trade tensions that have rattled the world economy appeared to cool this week as the main protagonists – U.S. President Donald Trump and Chinese President Xi Jinping – adopted more diplomatic stances.

The potential for a trade war and possible implications for global growth again top our weekly roundup of events in the world economy along with a recap of what central banks are thinking and why everyone is starting to worry about the euro area.

Trade Thaw

In warning Donald Trump against a “Cold War mentality” Xi Jinping reiterated pledges to open sectors from banking to auto manufacturing, a couple of days after Trump had said the two “will always be friends.” The U.S. President went a step further on Thursday, saying the two countries ultimately may end up levying no new tariffs on each other. He’s also directed officials to explore rejoining an Asia-Pacific trade pact he withdrew from shortly after taking office. While IMF Managing Director Christine Lagarde warned against the global trading system “being torn apart,” she expressed continued optimism about the economic outlook ahead of the Fund’s meetings next week. The World Trade Organization also predicted trade will grow 4.4 percent this year after 4.7 percent in 2017.

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Central Banks Choose Sides

How would central banks respond if there was a trade war? The problem is such an event would likely cause a bout of stagflation in which demand weakened and inflation accelerated, leaving policy makers to decide which to combat. Bloomberg’s Matthew Boesler reported this week that in the case of the Federal Reserve it would likely focus on offsetting the hit to demand rather than the faster prices. Among those setting policy this week, Serbia and Mozambique cut interest rates, while Poland, Ukraine, Namibia, Uganda and South Korea stayed on hold. The Monetary Authority of Singapore, which uses the exchange rate as its main tool, tightened monetary policy, allowing its currency to strengthen in the face of solid economic growth. 

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Europe Worries

More questions are being asked about the prospects of the euro area with industrial output in the region unexpectedly declining for a third consecutive month and investors turning negative on the economy for the first time since July 2016. Such reports added to signs that momentum slowed after growing at the fastest pace in a decade in 2017. Against that backdrop, European Central Bank officials rejected a push to declare that the conditions are almost in place to end their bond-buying program although President Mario Draghi and colleagues expressed cautious confidence in the outlook. Outside of the euro area, Britain’s economy may not be as strong as it looks as Brexit nears.

What Happened in the World Economy This Week and What It Means

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Weekend Reading

Chart of the Week

What Happened in the World Economy This Week and What It Means

To contact the author of this story: Simon Kennedy in London at skennedy4@bloomberg.net.

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