Global Outlook (August 2017)
Good Global Growth Prospects

“The world economy is entering a new phase, where monetary policy normalisation will follow the stabilisation that we are seeing in the real economies of many developed markets.”

Richard Jerram, Chief Economist, Bank of Singapore; Member of OCBC Wealth Panel

Key Points:

  • Stronger economic growth has led to developed economies absorbing excess capacity, which naturally reduces deflationary risks and pushes central banks to start moving away from the exceptionally loose monetary policy of recent years. However, there is no urgency, so it is likely to be a gentle stroll for the exit, not a rush.
  • The U.S. economy is in the later stages of expansion, but showing none of the signs that would lead us to fear that a downturn is imminent. Poor productivity growth is a medium-term challenge, but not one that is unique to America.
  • Hopes for substantial economic reform or tax cuts have faded, with continued acrimony and division in U.S. politics. Raising the debt ceiling in September is set to be the next area of controversy and has a serious chance of being disruptive.
  • Trade conflict could become more of a threat in coming months, with renegotiation of NAFTA and growing friction with China. This could also be used to distract attention from the administration’s difficulties in other areas.
  • The scale of Europe’s recovery from the systemic crisis earlier in the decade was illustrated by Greece’s return to the bond market, issuing five-year paper with a yield below 5 per cent.
  • Growth across the Euro-zone region remains impressive, with PMIs showing only limited slippage from recent six-year highs. Similarly, the Eurozone unemployment rate has fallen from a peak of 12.1 per cent to 9.3 per cent, the lowest since 2009.
  • In Japan, the country is facing an extreme version of the situation in America, where economic recovery has produced unusually tight labour markets, but without much impact on either wages or price inflation. The expectation is that, in the end, supply shortages will lead to prices moving higher, but after two decades of deflation, behaviour is proving to be very slow to change.
  • The improvement in China’s growth momentum extended into 2Q2017, with GDP expanding at 6.9 per cent for a second consecutive quarter. Moreover, the implicit quality of the growth has improved, perhaps due to a credit squeeze, as the gap between lending and nominal GDP growth has narrowed.
  • Nevertheless, credit is still rising as a share of GDP, so the vulnerability of the system continues to increase. Financial stability is an increasingly important policy concern, but it is secondary to maintaining an adequate growth rate. Tension between the two gives us the stop-go cycle of recent years.
  • 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.
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