Global Outlook (July 2017)

Still Far From A Recession

“Even though growth momentum is fading, the next recession is still some way in the distance. Meanwhile, policy settings are supportive for growth, with monetary tightening still in its infancy, while fiscal policy is neutral.”

– Richard Jerram, Chief Economist, Bank of Singapore

  • In recent months we have argued that the economic and policy news flow is “as good as it gets”. However, this is far from suggesting that the world is heading back into recession. The current U.S. economic recovery began in June 2009 and is now entering its ninth year. It is already the third longest on record. Inevitably this raises questions about how much longer it can continue.
  • History shows that cycles die due to policy tightening (often in response to inflationary overheating or weak government finances) or external shocks. By their nature, shocks are unpredictable. Aside from geopolitics, a surge in protectionism looks like the best candidate at the moment, but news on that front has been reassuringly quiet, despite the pre-election rhetoric of President Trump.
  • Geopolitics nearly always feels frightening, as we tend to lack historical perspective in remembering how uncertain things were in the past. Risks are probably higher than before, with the U.S. abandoning its global leadership role under Trump’s “America First” policy.
  • Policy tightening can lead to recession, but is in its early stages. America is leading the way on monetary policy, but even there it is set to be 2019 before interest rates reach neutral levels, even on the Fed’s hawkish projections. Until then, the support offered to the economy will be diminishing as interest rates rise, but the impact will still be positive and should help to keep growth above trend. Central banks in other major developed economies are likely to be much slower than the Fed in tightening policy.
  • Fiscal support was reversed in 2011-13 which slowed growth and led to a renewed downturn in some peripheral European countries. Government finances have now stabilised and there is no pressure for further austerity; if anything, fiscal policy might be slightly positive for growth.
  • Economic recovery in Europe continues to pull down the unemployment rate and this might be contributing to the declining vote for populist parties. The jobless rate in the Eurozone is down nearly 3 percentage points to 9.3 per cent, and in Spain it has been much more striking. However, Italy continues to lag, which implies continued concern over elections that must be held by 2Q2018.
  • China remains on its “stop/go” policy path, with a liquidity squeeze in response to a solid period of growth and another surge in the housing market. Tightening credit conditions should be effective in slowing growth in such a highly indebted economy, and policy-makers will need to ensure they do not hit the brakes too hard in such a politically sensitive year.
  • South East Asian economies continue to prosper. Reforms have pulled most of the lower income economies up the competitiveness rankings, which has helped to boost investment levels and growth. India, Indonesia, the Philippines and Vietnam stand out for their progress in recent years, and in each case this looks set to continue.