Global economy showing marked improvement
Global economic update
Prospects for international economic growth have improved notably throughout the first half of 2017. At the outset of the year, we expected a 2.7 percent rate of growth in the global economy. Based on the evolution of the data, we are updating that to 3.3 percent due to an acceleration of growth in the advanced economies, a rebound in emerging markets and monetary stimulus in China.
Stabilization in commodity prices, most notably in metals and agriculture, are supporting a rebound in growth above near recessionary levels. Solid demand in the advanced economies will result in further gains across the commodity complex this year and into 2018, with one notable exception being oil prices. Difficulties inside the OPEC countries (See: The Real Economy, April, 2017, “OPEC’s waning power and the production standoff”) in obtaining production cuts in oil, noncompliance in the non-OPEC oil producers and surging production in the United States have caused oil prices to decline 17.1 percent since Jan. 1. We do expect oil prices to rally later this year on rising demand and seasonal factors.
One risk to the recovery in commodity prices is the possibility that the United States will place tariffs on steel imports due to alleged national security concerns. The Trump administration did place tariffs on Canadian soft lumber earlier in the year and there is a risk to global trade due to the administration’s protectionist policies.
Eurozone: Economic growth appears self-sustaining
In the eurozone, purchasing managers’ surveys are at multiyear highs, driven by growth in German manufacturing. Given that political risk in the eurozone is now easing, and the recent public admission by the German government that EU reforms in the near term are necessary, we think it’s possible that the current account surplus in the German economy could be put to use via the fiscal channel next year, which would bolster the EU economy in a significant way.
The outcome of the French presidential and parliamentary elections was very encouraging with respect to the structural reforms necessary to put the French economy back on track for growth. If those reforms are put in place, investors should expect rising equity valuations and upwardly revised forecasts for the final quarter of 2017 and into 2018.
With the European economic recovery appearing to be self-sustaining, the European Central Bank (ECB) should take the next step forward in preparing markets for tapering of asset purchases from the current €60 billion per month. We anticipate that announcement should be made early in the fall. While the ECB has stated that it would not lift rates until it ended its asset purchases, it wouldn’t be surprising to see an earlier start date to the central bank’s policy normalization process in 2018 once inflation begins to move higher.
U.K.: Brexit realities beginning to hit home
Meanwhile, the U.K economy has slowed somewhat as the realities of Brexit hit home. Growth increased at a sluggish 0.3 percent rate in the first quarter as higher food and petrol prices began to be felt by households. The UK consumer price inflation rate is up 2.9 percent on a year-ago basis. Sterling is up 3.6 percent on the year, which has mitigated some of the inflation now surging through the economy. However, against a backdrop of slowing growth and rising prices, it’s doubtful that the Monetary Policy Committee (MPC) is in a position to support growth or restrain inflation. We expect the MPC to remain on hold for 2017 despite the preference for a minority on the committee to hike rates sooner rather than later.
North America: Mexico, Canada economies remain solid
While the United States should see growth near the cyclical trend of 1.9 percent, growth in the Mexican economy likely rebounded at a 2.8 percent pace in the first quarter, and the Canadian economy increased 3.7 percent. Canada’s business investment spending increased at a 10 percent rate through the first three months of the year. With U.S. consumption proceeding at a 3 percent pace, demand for Canadian and Mexican exports should remain solid and underscore a good year of growth in the economic bloc. Moreover, it does appear that NAFTA modernization is moving forward on terms favorable to overall growth without disruption to the critical NAFTA supply chain (See: The Real Economy, June, 2017, “Why modernizing NAFTA is crucial for the middle market”).
Latin America: Venezuela, Argentina weighing on region
The Latin American economy is on the mend. However, the socioeconomic breakdown in Venezuela and difficult transition in Argentina continue to act as drags on area growth. Ongoing problems in the political sector will continue to weigh on foreign investment in Brazil, despite modest rebound in growth. Chile is the only major Latin economy that will observe solid growth this year.
Japan: Economic expansion remains solid driver of global growth
The Japanese economy expanded for the fifth consecutive quarter and is up 2.2 percent on a year-ago basis through the first three months of the year. This marked the longest stretch of economic expansion in over a decade, which is one of the major drives of overall global growth this year. Given the Bank of Japan’s commitment to meeting a 2 percent inflation target--inflation stands at 0.4 percent--we don’t anticipate any change in policy from the central bank in 2017.
China: Bloated debt levels remain a concern
Finally, Chinese GDP accelerated to 6.9 percent in the first quarter of the year in contrast with 6.7 percent to close out 2016. Easier lending conditions across the Chinese economy have boosted growth along with resurgent demand from the advanced economies. However, we remain very concerned about bloated debt levels across the household, local and national governments. In our estimation, debt dynamics inside the Chinese financial and banking systems are the primary medium-term risks to the global economy.