From a solid start in January, the world economy seems to have moved up a gear during February. Renewed momentum is particularly evident in the Euro area and Japan (where flash PMI’s have hit multi-year highs in February). India is also moving beyond its policy-induced slowdown towards the end of last year and Brazil and Russia are emerging from their respective recessions. Global inflation has also picked up, but is expected to remain manageable, with the interest rate environment continuing to be favourable for emerging economies.
Second quarter economic indicators confirm a re-acceleration of the economic momentum gaining traction since the middle of last year. The IFO World Economic Climate indicator jumped a notable 10.4 index points during the second quarter, indicating both improved actual business conditions and 6-month expectations. The novelty of the current cyclical improvement in the world economy is that it is occurring with less drag from the after effects tied to the global financial crisis and fiscal restraint. Business and consumer sentiment is picking up and driving improved fixed investment and consumption spending.
From 2.5% real GDP growth in 2016, global growth is expected to come in close to 3% during the second quarter and accelerating further towards the end of the year. The USA is expected to implement some fiscal stimulus (read: tax cuts and infrastructure spending) and deregulation measures to boost growth above 2% this year and 2.6% next year. In the Euro area growth has already accelerated to a 2% pace during the first quarter and is forecast to maintain this pace over the short term, also assuming less of a tail risk from political uncertainty given the referendum and election outcomes in Italy, the Netherlands and France. China’s infrastructure push continues, keeping its growth tempo at elevated levels (measured at 6.8% in the first quarter). India has also recovered from the central bank monetary intervention at the end of last year, with the economy showing a bright medium-term outlook.
The emerging economy picture is a mixed one, with the oil and commodity producing economies still adjusting from the 2011-15 commodity price collapse, some dynamic economies performing very well (e.g. Mexico, Indonesia and other East Asian economies) and others shaking off deep recessionary forces (e.g. Brazil & Russia). Emerging economies (excluding China & India) are forecast to accelerate over the medium term, from growth of 2.1% last year to 4.6% in 2021. These countries may be impacted by a slowdown circa 2019, driven by a forecast cyclical downturn in the USA and slower growth in China and Europe. The 5-year average growth forecast is projected to pick up from 3.4% (2011-16) to 3.7% (2017-21). Infrastructure spending will be a central theme over the medium term, given China’s ‘One Belt, One Road’ policy, the USA’s infrastructure spending stimulus and the economic recovery in the Euro area.
Global inflation outlook
Global inflation is expected to respond to the economic expansion currently underway. However, we do not foresee any reason to be alarmist in this regard, despite the current noticeable spike in global producer price inflation. The USA is the furthest progressed on its cyclical recovery, reflected in a tightening labour market. Core inflation is likely to come under increasing pressure as the economic recovery matures, but the Fed is likely to hike interest rates, which should keep inflation expectations and actual inflation under control. Headline inflation is also likely to decelerate over the near term due to slightly weaker commodity prices. Emerging economies have on balance experienced lower core and headline inflation in recent years, albeit that core inflation remains sticky downwards. Globally, less-than-robust demand conditions will keep inflation in-check.
Pieter Laubscher
21 May 2017