5 May 2017
Green Shoots in the Global Recovery
Momentum in the global economy has remained surprisingly robust so far in 2017
Momentum in the global economy has remained surprisingly robust so far in 2017, underpinned by improved bank lending, healthy consumer spending, and stronger business investment, across both advanced economies and emerging markets alike. While still vulnerable to a negative economic shock, financial market instability, and heightened geo-political uncertainty, the green shoots of a global economic recovery are starting to show. For the first time since 2011, both advanced economies and emerging markets are expected to see output growth rise above its long-term trend (Chart).
In the US, the Trump presidency is yet to have any discernible impact on economic growth, with the US economy continuing to enjoy solid momentum and declining spare capacity. With the unemployment rate continuing to trend lower, the Federal Reserve is expected to take a more active role in raising interest rates through 2017. At this stage, the Fed is expected to raise the Federal Funds rate to around 1.5% by the end of 2017. At the long end of the curve, US bond yields are expected to rise to around 3% by the end of this year, for the first time since 2014. Higher US interest rates will have a significant potential spill over effect on the global cost of capital, as historically there is a high correlation (of around 0.75) between US and global bond yields. Indeed, most markets have already seen bond yields begin to trend higher.
Source: Bloomberg, Grosvenor Research
Although the UK economy ended 2016 with impressively strong growth, momentum has begun to falter in 2017. This slowdown has been attributed to lower consumer spending, with retail sales in the three months from November recording their weakest holiday sales period since 2009. Consumer spending is expected to remain subdued through 2017, with higher import prices and energy prices expected to stoke headline inflation and further erode consumers’ real incomes. Beyond these short-term effects, the economy faces significant uncertainty with a snap general election called for 8 June just as Brexit negotiations begin in earnest. Added to this, the Scottish National Party (SNP) continues to press for another Scottish independence referendum, provisionally to be held after the Brexit process is completed (and subject to the SNP’s performance in the general election). These political clouds are likely to see the Bank of England maintain its accommodative monetary policy stance through 2017.
In the Eurozone, economic activity has continued to improve, boosted by improved domestic demand. Consumer spending has continued to recover, underpinned by stronger labour markets, low oil prices, a neutral fiscal stance and accommodative monetary policy. The momentum in the Spanish and German economies continued, with GDP increasing by 3.0% and 1.8% y-o-y, respectively. In contrast, both French (1.2% y-o-y) and Italian (1.0% y-o-y) GDP growth remains underwhelming. Structural issues (particularly in France and Italy), high unemployment, rising inflation, high levels of public and private sector debt, and significant banking sector problems (particularly in Italy) continue to cloud the medium-term outlook for European growth. One bright spot for market confidence in the Eurozone is the apparent cresting of populist sentiment on the continent. With moderates dominating in the Dutch elections and first round of the French elections, the year’s main domestic political uncertainties are beginning to recede, which should improve investor sentiment.
In Asia, the Chinese Premier Le Keqiang announced a 2017 real GDP growth target of 6.5% p.a. More importantly, he acknowledged that China’s rapidly expanding credit market has kept “zombie” companies afloat and that this risked creating bubbles in asset markets. He singled out official credit institutions as well as the shadow banking sector for fuelling the expansion. This is significant as it marks one of the first instances of a high-level Chinese policy maker publicly acknowledging the country’s growing debt problems.