Global Outlook (September 2017)

A Very Moderate Slowdown

“Even though growth momentum has peaked in 2Q 2017, the slowdown is very mild and does not involve any substantial disruption; but trade flows are moderating and that will have an economic impact in coming months.”

– Richard Jerram, Chief Economist, Bank of Singapore

The PMIs in developed economies are showing some signs of slippage, but so far it is very mild. Asia is a touch softer which is in line with the idea that trade flows are leading the slowdown. In both cases, PMIs are comfortably above 50, indicating continued expansion.

The next recession is still too far in the distance to speculate over the timing. There are some areas of stress – such as Chinese debt or tight U.S. labour markets – but nothing that is flashing an urgent warning signal.

United States
The U.S. economy has experienced a sub-par recovery over the past eight years, with GDP growing an average of 2.1 per cent. This year and next are unlikely to be much different, especially as the chance of big fiscal policy changes has faded. However, even this pace of growth has been enough to bring the unemployment rate down from a peak of 10 per cent down to just 4.3 per cent, but it is hard to see how job growth can keep running at the 180,000 pace of the past year for too much longer as the pool of workers dries up.

Political chaos in Washington also raises the danger of a government shutdown or trouble in raising the debt limit. In the past this has been resolved without much disruption, but the confrontation between President Trump and Congress implies a higher level of risk.

The situation in Europe is starting to look like that in the U.S., albeit with a time-lag of a few years. The unemployment rate has been falling steadily and is now at the lowest level since 2009. So far, the rebound in Euro has not been much of a drag on the manufacturing sector.

United Kingdom
Brexit talks will warm up in coming months and the UK government has been releasing papers outlining its position on various issues. However, this has served to highlight the difficulties in reaching an agreement within the UK, let alone with the European Union. An orderly exit by March 2019 looks impossible, but even the nature of a transition period is far from clear.

Japan’s 4 per cent expansion in 2Q beat the 2.6 per cent in the US and 2.5 per cent in the Eurozone. This looks like the culmination of the pick-up in global activity over the past year that is now starting to fade. This is a partial victory for Abenomics, although slow progress on structural reforms and persistent deflationary concerns limit any celebration.

China remains on its “stop / go” policy path, as the focus swings between supporting growth and controlling the credit bubble. Moderate monetary tightening is pointing to a slower economy in coming months and the softer data for July might be an early sign of a shift in pace. Trade friction with the U.S. represents the main threat to the benign short-term outlook.

Emerging Markets
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. Even compared to four years ago, when we saw a sharp adverse reaction to then-Fed Chair Bernanke’s “taper tantrum”, the situation looks much more solid.