Global Outlook (April 2017)

As Good as it Gets?

“It looks hard for the recent growth surge to continue to accelerate while central banks in various developed markets are preparing to signal policy tightening. Optimism over reforms in the U.S. seems to have peaked.”

– Richard Jerram, Chief Economist, Bank of Singapore

  • The overall macroeconomic situation looks encouraging. Growth has improved, deflation risk has fallen and the need for emergency monetary policy has faded. However, this makes it hard to see where the next incremental positive surprise might come from and as a result, this might be as good as it gets.
  • Economic data has consistently surprised on the upside for several months, which has boosted investor confidence and supported strong corporate earnings upgrades over the past year. Yet economic surprise indexes are at elevated levels and may moderate in the months ahead. This means that we could be near to a point of maximum optimism on macroeconomic drivers and we could see a pause in the recent acceleration.
  • In the U.S., measures of consumer and small business confidence are showing exceptional strength. However, optimism about the scale and timing of major economic policies from the Trump Administration is prone to disappointment. Overhauling the U.S. health care system has stalled. Enacting corporate tax reform and approving large-scale infrastructure programmes may run into hurdles given legislative and economic realities. An additional concern is that if Trump fails to move his economic agenda forward, then he might move backwards through the use of trade protectionism to distract attention from domestic difficulties.
  • In the Eurozone, it looks like 2017 could produce the strongest growth in a decade. The transmission of monetary policy has improved in response to a healthier financial system, which is supporting economic activity. Purchasing Manager Index (PMI) readings are showing the best business conditions since before the start of austerity programmes in 2011.
  • However, it might also be as good as it gets for European politics, as confidence grows that the French elections will not be disruptive. Before long, the focus will shift to Germany, and then to Italian elections which appear to involve far more hazards, with much greater support for anti-Euro parties.
  • In Japan, inflation is gradually starting to lift, and the Bank of Japan is expected to start to increase its target for 10-year bond yields in 2H 2017 in response. Unfortunately structural problems remain 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.
  • In China, a solid growth outlook for 2017 means that protectionism, rather than a burst of stress in the domestic financial system, is the greater threat to stability in China. So far the Trump administration has been surprisingly quiet on trade relations with China, compared to its pre-election rhetoric, but America’s huge bilateral deficit means that tensions could easily surface.