September 08, 2016
Economic Daily News: The Global Economy Rebalances the Role of the Mainland
The global economy staged an impressive, broad-based recovery in 2017. Growth accelerated in about three quarters of countries; the highest share since 2010. After nearly half a decade of declines, global capex growth sprung back into positive territory, reigniting the global trade cycle. Alongside healthy aggregate demand, supply side measures by China across several industries facing overcapacity have lifted prices and looks set to help lift global inflation back to healthier levels. Gone are the days fearing for “debt-deflation”. With leading indicators such as global PMIs and capex intentions all pointing upwards, the global economy is expected to build on strength in 2018.
United states: The US is experiencing one its longest economic expansions in history, and we see this continuing in 2018. Record low unemployment, wage growth and strong consumer sentiment are strong anchors for consumption growth. Tax cuts and expectations of more pro-business policies from the Trump administration are also expected to keep the pedal on the acceleration of corporate investment cycle. Inflation gone through fleeting weaknesses in 2017 even as the economy ran close to full capacity. As transitory factors fade, we believe that core PCE has troughed in 2017 and would move progressively towards the Fed’s target of 2% from 1.35% now. Short end interest rates should gradually move up as the Fed continues its hiking cycle.
Europe: Activity data across Europe is expected to remain solid in 2018 as hinted by Markit Eurozone manufacturing PMIs, which have been above 60 in recent months. Consumption should also pick up, driven by improvements in the job market. Though high in absolute terms, the Eurozone jobless rate has fallen to 8.7%, the lowest reading since 2009. Contained inflationary pressures should allow the ECB to maintain an accommodative policy stance until its asset purchase program ends in September 2018. While the risk of a policy error is always present, we do not expect the ECB to tighten too aggressively. Political risks will need to be monitored closely; especially Brexit talks and elections in Italy.
Japan: A continuation of accommodative fiscal and monetary policies alongside firm external demand should keep the Japanese economy on a strong footing in 2018. Much like the United States, inflation has been frustratingly weak, with CPI hovering around 0.6%, much lower than the BoJ’s 2% target. Inflation should grind higher in 2018, driven by a tight labor market. Higher wage growth on the back of political support should help stimulate domestic consumption. The biggest curveball would likely be BOJ’s potential tweaks to its yield curve control mechanism, especially in the face of meaningful leadership reshuffle at the central bank in the upcoming spring.
Emerging markets: China is expected to see slower but higher quality growth in 2018, as the authorities continue to rebalance the economy away from credit-fueled investments and towards consumption and services. China’s supply side reforms should keep commodity prices elevated, a continued boon for commodity-oriented EMs such as Latin America and Russia. More broadly, a stronger global trade cycle bodes well for Asian and EM exporters. Strong fundamentals and a revival in credit growth should revive domestic demand from larger, domestic-oriented EMs such as India and Indonesia. Given the growing complexities and influence of China, any policy misstep from the giant in its economic rebalancing and deleveraging process is ever more so a risk for emerging markets and the broader world economy.