Uneven regional growth continues to characterise the global economic landscape. The growth momentum is also not great. While there is closer convergence across the Atlantic, with Euro area growth steadily approaching that of the USA, where growth has been cooling down somewhat, the divergence between the advanced and developing economies has widened. Short-term forecasts in respect of a range of emerging economies have been scaled down (e.g. Brazil, Russia and some African economies, including the oil-producing Angolan and Nigerian economies). The economic slowdown of China also continues, albeit that the authorities are ready to stimulate growth.
The second quarter of 2015 is likely to produce around a 2% growth rate in the global economy, up from the 1.5% estimated growth rate during the first quarter. We need to wait until the second half of the year to get back to above 3%, when the US economy is back on track, the Euro area continues to accelerate, Japan delivers stronger growth, China being supported by policy stimulus and the other emerging economies moving beyond their current malaise. Global growth is expected to come in around a 2.5% pace this year, in line with the preceding two years, then to pick up the 3% next year.
Regional context
Euro area. The composite Euro area PMI increased to a four-year high during the second quarter of 2015, i.e. signalling 1.6% annualised GDP growth. Both the services and manufacturing sectors are recovering. Whereas the news have been dominated by the Greek financial crisis, real economic conditions in the Euro area is steadily improving. Currently the outlook is for 2% growth this year, accelerating further to 2.5% next year. We expect a deal will be reached between the Greek government, the EC and the IMF and in this way preventing a break-up of the euro.
USA. The US real GDP growth came to a standstill (actually contracting slightly) during the first quarter of the year. This has led to the lowering of growth forecasts, i.e. the 3%+ growth prospect seemed to have been shelved. It was mainly the strong dollar and the fall in the oil price that hit the industrial sector (including shale oil production), which saw exports and investment tumbling. The labour market looks healthier, with 280 000 new non-farm payrolls in May and wage growth starting to pick up. Lower household debt levels, low inflation and interest rates should ensure a recovery in household spending. It seems that interest rate expectations continue to be scaled down and shifted outwards – early 2016 remains our call when the Fed is likely to gradually begin getting rates back to normal levels again. Real GDP growth is expected to come in around 2% this year and 2.5% next year.
Japanese. In Japan, exports and fixed investment spending have responded to the competitive levels of the yen. Furthermore, the labour market is tightening, with wage growth picking up and expected to support a recovery in household spending. The economy is forecast to grow around a 1.5% pace this year and next having shrugged off the VAT hike-induced mini recession last year. More monetary stimulus is also expected as inflation is likely to continue undershooting the 2% target.
China and other emerging economies. China and the other emerging economies share the advanced economy problem of high debt levels. China do have a huge war chest to support the economy. The industrial sector continues to struggle. While the slowdown in production stabilised in June, worker retrenchment continues, reflecting weak expectations regarding demand conditions. This implies the government is likely to continue stimulating the economy, underpinning demand for infrastructure-related commodities. Other emerging economies may find the going tougher. Brazil is hiking interest rates despite the economy being in recession as inflation is too high (heading for close to double digit levels); Russia is also in recession. East Asian emerging economies and around the rest of the global have to navigate the likely rise in US interest rates and given high debt levels, bank credit is expected to be tightened. Forecasts for emerging economies’ real GDP growth have been scaled down to below 5% next year, from below 4% this year.
Pieter Laubscher
26 June 2015