6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  Chart 6b: But households still optimistic about their own prospects Differences from averages since 1985 (number of standard deviations) 1.4 1.2 General economic situation expectations  1.0 0.8 0.6 0.4 0.2 0.0 -0.2 Personal financial situation expectations  -0.4 -0.6  Jan. 16  Jul. 16  Jan. 17  Jul. 17  Jan. 18  Jul. 18  Jan. 19  Sources: European Commission, University of Michigan consumer sentiment index, and Bank calculations. Notes: The chart shows the median across the G7 euro area countries (France, Germany and Italy) and the US. Reconciling market moves with global developments All in all, the risks to the global economy have shifted to the downside. But to what extent? Does the sea change in financial markets presage a sea change in the global economic outlook? And what does the UK experience suggest? A lot will rest on the scale and breadth of the trade effects. Traditional trade models suggest that the direct effects of the tariff measures implemented so far4 are likely to be small. The Bank estimates that these measures will reduce global GDP by only around 0.1%, and the further US-China tariffs that took effect in May and June will roughly double that effect (Table 1).5 But that may not be the end of the story.
This multiplier lies between the estimates published by the Fed for the two variants of their FRB/US model: one in which expectations are formed using a VAR and the other in which they are model consistent. In the former, a 1 percentage point shock to the federal funds rate boost GDP by around ¾%; in the latter, the same shock boosts GDP by around 1½%. 12  All speeches are available online at www.bankofengland.co.uk/news/speeches  12  That seems a bit extreme, since the US and China are far less closely integrated through trade, financial and labour market linkages than are the UK and the EU. For example, 45% of the UK’s trade is with the EU, while under 20% of the US’s trade is with China and only 7% of China’s trade is with the US. It is possible that concerns about still-quiescent inflation in major economies and the related risk of a global liquidity trap are contributing to the recent large moves in interest rates. In the US, core PCE inflation fell back below the FOMC’s 2% target earlier this year. In the euro area, core inflation has been hovering around 1% for much of the past five years. For both economies, market measures of long-term inflation expectations have drifted down over the past year (Chart 10).