The catalog of risks threatening the extended upswing is long indeed. We have U.S. President Trump who in his “America First” campaign raised, among other issues, the prospect of protectionist politics. Then, there are EU opponents and nationalists, especially in the Eurozone, who may gain momentum ahead of the upcoming elections. And high corporate debt in China, which is weighing on the outlook for growth. Despite these risks, the global economy maintains its moderate growth momentum. One indicator of this are the purchasing managers indices, which show that the majority of purchasing managers expect a further improvement in the economy.
Among the advanced economies, the United States is expected to make a major contribution to global growth. In 2017, U.S. real gross-domestic-product (GDP) growth should accelerate by 0.6 percentage points to 2.2 percent. Gross investments are expected to make a larger contribution this year after falling in the prior year and limiting growth. Unemployment is likely to continue to decline to the level of full employment. This should provide a moderate boost to wages and allow the upward trend in consumption to continue. Higher wages and increased demand could drive the core inflation rate to 1.9 percent, which would be just 0.1 percentage points below the target inflation rate set by the U.S. Federal Reserve (Fed). This supports the notion that the Fed may announce another two to three moderate rate hikes before March 2018.
The Eurozone is also continuing its moderate upswing. Sentiment indicators such as consumer confidence and purchasing managers' expectations, as well as hard data such as industrial production and order intake, point to continued steady economic development ahead. The still relatively high aggregate unemployment rate, however, is likely to limit any increase in wages in the Eurozone, despite the trend of falling unemployment. This would indicate a more moderate rise in consumption, which would in turn impede overall growth momentum. Another factor that could potentially limit growth is politics with important elections taking place in the weeks and months to come. This may initially put a damper on investment activities, at least until investors can gain more clarity. Despite these headwinds, the Eurozone’s economy is still expected to grow 1.5 percent in 2017 and 1.4 percent in 2018.A rise in inflation should be enough to cause the European Central Bank (ECB) to reconsider its loose monetary policy. In addition, the ECB’s self-imposed limit to buy only up to one-third of an issuer’s bonds greatly limits the universe of bonds that come into question. This is another argument why the ECB will likely consider ending quantitative easing (QE). On the other hand, the ECB’s interest could continue to limit a growth-inhibiting rise in yields and strengthen the banking sector. It is conceivable that the first step will be to taper quantitative easing followed by moderately raising interest rates. This would mean that the banking sector would have to continue operating in a low-interest-rate environment. However, if that were the case, the sector could find compensation, if needed, in the form of low-interest, targeted longer-term refinancing operations (TLTROs).
The main growth engine for the global economy among the emerging economies is Asia. China plays an important role in this region’s growth due to its size. Through gradual change, the Chinese government wants to get a handle on the problems it faces from bad investments, overcapacity and high debt in the state-owned corporate sector. Private consumption as a growth vehicle has been gaining in importance since 2015, which leads us to expect China’s economy to grow by 6.3 percent p.a. in both 2017 and 2018. On the whole, it can be said that the picture for the advanced and emerging economies is mixed. A look at the individual countries also shows that the upturn is gaining regional breadth. The peripheral countries in the Eurozone are also likely to continue their recovery in 2017. The U.S. economy is growing stronger again. The economies in Brazil and Russia, which had been suffering from falling commodity prices, are also likely to slowly trend higher in the years ahead.
The number of jobs continues to grow, and unemployment is low. Finally, it is starting to look like full employment may be achieved in the United States.
Source: Thomson Reuters Datastream; as of 3/16/17
The upswing in the emerging economies is gaining breadth. The economies in Brazil and Russia should resume growth.
Sources: International Monetary Fund, Deutsche Asset Management Investment GmbH; as of 3/23/17