Global Outlook (May 2017)

Economic Momentum is Slipping

“We see early signs that economic momentum is slipping. The lack of progress on economic policy in the U.S. is more of a concern, where the first 100 days of the Trump presidency have not delivered much change and tax reform looks increasingly difficult.”

– Richard Jerram, Chief Economist, Bank of Singapore

  • Last month we asked if this was “as good as it gets?” That concept has been supported by the softer flow of data and policy news. Any loss of momentum is unlikely to be very troubling, but it is increasingly difficult to see where the next piece of good news will come from.
  • The theme of “as good as it gets” extends to the policy arena, where hopes for significant economic reform in the U.S. has faded. On the monetary side, the Fed seems intent on tightening policy much faster than expected, while the ECB is also starting to look for an exit.
  • The hope was that the first 100 days of the Trump presidency would offer some clarity on policy priorities. Unfortunately, despite all of the political activity and controversy, we have not learned very much about the plans for economic policy.
  • Japan has mirrored the rest of the Asian region – indeed, the world – in seeing a pick-up in trade flows and business confidence over the past six months. This was pointing towards higher inflation and the Bank of Japan starting to raise its target for 10-year bond yields in 2H 2017, but that seems likely to be delayed after the recent spike in the exchange rate.
  • Structural problems remain in Japan and reform is making only limited progress. Labour markets are very tight and would benefit from reform that improves flexibility and productivity, but this does not seem likely.
  • China’s economy recorded impressively rapid growth in 1Q 2017, with GDP up 6.9 per cent and the strongest industrial production growth since 2014. This fits with the “as good as it gets” outlook for the world economy, with policy tightening likely to produce a moderate slowdown as the year develops.
  • China’s huge trade surplus with the U.S. implies a persistent risk of trade friction. So far the Trump administration has been surprisingly quiet on trade relations, compared to its pre-election rhetoric, highlighted by declining to label China a currency manipulator. However, there is low confidence that this will continue.
  • The European economy is looking similar to the performance seen in the U.S. earlier in the cycle. Growth is solid, unemployment is falling, credit transmission is improving, but underlying inflation is still very subdued. This creates a challenge for the central bank in terms of judging how long to wait before starting to cut back on monetary support.
  • Elsewhere, most emerging markets continue to look healthy, buoyed by the pick-up in global trade and commodity prices, as well as the domestic policy improvements of the past few years.
  • We can expect pressure on some deficit countries in emerging markets as U.S. interest rates continue to rise, and the cost of attracting capital becomes more expensive, but this does not seem likely to become a systemic problem.