30 JAN

2018

Macro , Asset Class

Global economy: will 2018 be a pivotal year?

Economic activity continued to improve in developed and emerging economies alike at the beginning of 2018. The global economy is now entering a trickier phase, however: China needs to get its debt under control. In advanced economies, the decade of central bank balance sheet expansion is drawing to a close and visibility on US economic policy has diminished.

 

A more dynamic and stable global economy

The global economy has not been this dynamic since the end of the Great Recession. Driven by rebounding activity in commodity-exporting countries, persistently strong growth in emerging Asian countries and the euro zone recovery, global growth upped the pace significantly in 2017, hitting a six-year high of 3.6%. True, this is still well below the 5% observed in the mid-2000s, but in the meantime the financial crisis has sapped growth potential just about everywhere.

Reflecting this renewed momentum, last year growth accelerated in over 60% of countries representing nearly three-fourths of the global economy! The IMF has just raised again its growth forecasts for 2018 and 2019. The global economy is also more stable now: growth rate volatility has decreased sharply, current international growth imbalances have fallen and, in developed countries, the private sector debt burden has stabilised. Yes, domestic debt has continued to climb in emerging regions, but only in a few countries - particularly commodity-exporters - which are dependent on investments from the rest of the world to finance this debt.

Things are different in China, where the sharp rise in debt reflects abundant domestic savings. The rapid accumulation of debt since the 2007 financial crisis is no less of a threat to financial stability. The authorities have put the brakes on corporate lending, now focusing on slowing the rise in household lending...meanwhile, they are furthering their efforts to rebalance growth in favour of consumption.

 

 Sources: IMF, Candriam

 

United States: many unknowns remain

After slowing to around 1.5% in 2016, growth gathered pace and is expected to be close to 2.3% in 2017, i.e. its average level since 2010. Business investment has made a particularly strong comeback. The relative stabilisation of the USD and dynamic global demand should continue to drive exports. Household spending will nevertheless remain critical for growth. Households have cleaned up their financial position since the crisis. Above all, with the economy nearing full employment, wages should start climbing somewhat faster, paving the way for income and thus consumption to sufficiently improve. The biggest question mark lies in the outcome of the budget decisions still on the table: the tax reform (Tax Cuts and Jobs Act) has been greenlighted, but the US has yet to lock in a budget for fiscal year 2018 and the debt ceiling has not been raised. While the tax reform has little chance of significantly stimulating activity, federal spending in 2018 may hold greater potential for economic support. 

With a moderate fiscal stimulus, growth should be well over 2.5% in 2018. The Fed will continue normalising its monetary policy as job market conditions tighten further.

 

Euro zone: a solid recovery

The euro zone recorded stronger economic activity across the board. Growth was primarily driven by domestic demand, although its recent acceleration can also be attributed to an improvement in the trade balance. Exports will benefit further from global demand momentum. After sliding sharply during the crisis, construction investment picked up again in 2017 and capital expenditures were boosted by the improved demand outlook and the emergence of production capacity tensions. The considerable improvement in the job market took household confidence to its highest level since the early 2000s, and consumption has returned to pre-crisis growth rates. All in all, economic activity has everything it needs to continue hovering around 2.5% this year. 

Against this backdrop, the ECB announced it would be tapering its bond buying programme and indicated that it would only raise its rates “well after” ending its QE policy. After all the headline-grabbing elections in 2017 (in the Netherlands, France and to a lesser extent Germany), political uncertainties have since dissipated somewhat. 

Political risk has not been completely eliminated however: Italy will hold general elections in early March, and forming a government with a decisive majority promises to be tricky; Brexit negotiations are still nowhere near complete, despite the major step forward taken with the publication of a joint European Commission/UK Government Report outlining a solution on the future of EU citizens in the UK (and vice-versa), the UK's divorce bill and the Irish border. 

Brexit negotiations are on the verge of making a key initial breakthrough: a joint European Commission-UK government document outlining a solution on the future of EU citizens in the UK (and vice-versa), the UK's divorce bill and the Irish border has just been published. There are still some thorny issues to be addressed, however, such as future EU-UK trade relations...But the euro zone is now better equipped to manage these risks.