As far back as Homer (the blind Greek poet, not the portly Springfield resident), the dog days of summer, when the star Sirius tracks above the horizon in the Northern Hemisphere from early July to mid-August, were associated with catastrophe. That is how we felt two months ago when writing down our forecast for the global economy. A few weeks earlier, a slim majority of the citizens of the United Kingdom voted to leave the European Union but neglected to specify where they intended to arrive. First half real GDP growth in the United States was tracking below 1 percent. Oil prices might have settled in a trading range, but they might not have. Even more troubling, monetary policy in the Euro area and Japan was evidently not in the right place, and policymakers there did not exude confidence that they knew where “right” was.
In the event, market economies proved resilient over the duration of Sirius’s arc, and incoming data were somewhat reassuring. The marked depreciation of the British pound and decline in Gilt yields provided offset to the initial hit to confidence and activity, buoying economic data (but we suspect there is softening to come). Additional policy accommodation will likely be forthcoming from the Bank of England, the European Central Bank, and the Bank of Japan, although not as much or as quickly as market participants had suspected a few months ago. We have nudged up our projections for real GDP growth in the UK and Japan this year and the Euro area next year.