Turtles live long and move slowly. As we pointed out a while ago, they have that in common with the recovery of the world economy, now in its ninth year. Nowadays, however, the turtle cycle may no longer tell the whole story. Instead, it is quite helpful to think of some of the world's advanced economies as hares, a large kind of rabbit. Like the proverbial hare in Aesop's fable, such economies might either outrun the turtles – or disappoint.
There are still plenty of turtles, notably in continental Europe. Thanks to higher consumption and government expenditures, we now see the Eurozone as a whole growing at 1.8% in 2017 and 1.6% in 2018. Indeed, several smaller countries such as Ireland and Estonia have been racing ahead like hares. Spain looks set for an almost hare-like sprint – we expect growth of 2.7% for 2017. Germany and the Netherlands entered the crisis in pretty good shape. Even for laggards like Italy and France, we have recently upped our growth forecast a little, to 1.2%. Following recent elections, France might yet prove to enact the sort of structural reforms that worked elsewhere.
For the European Central Bank (ECB) this petting zoo of different growth, unemployment and inflation rates has always been a challenge. Risks remain, notably elections in Italy due to be held by May 2018. Still, the question is not if the ECB will start tapering its quantitative-easing (QE) programs, but when. As things stand, we might get the official announcement at the September meeting, and the entry into the exit happening in early 2018. After the German election in September, there might also be a renewed push towards fiscal integration to make the Eurozone work better.
In the United States, the scaling back of unprecedented monetary stimulus is already well under way. We expect the U.S. Federal Reserve (Fed) to increase the federal funds rate two more times through June 2018. However, it might put in a pause when announcing further details on how to shrink its balance sheet towards year-end.
Following last year's elections, the U.S. economy started to look more like a hare than a turtle. Hopes on fiscal stimulus and regulatory reforms raising growth potential were running high. U.S. households have regained a solid financial footing and remain confident, despite sluggish growth in real incomes. Even at recent modest levels, job creation remains above what's needed to keep up with trend demographics. With full employment slowly but steadily approaching, we expect labor costs to increase. Business investments have revived and financial conditions are generally supportive.
Alas, this particular hare has proven fickle, if progress is judged by the wild swings in consensus growth forecasts. Having been skeptical on the progress on various bits of Trump's agenda, notably cuts in corporate taxes, we would now point out that Congress might yet exceed diminished expectations. In our base case, we are taking down our U.S. growth forecasts a shade, to 2.1% for 2017 and 2.3% in 2018. However, U.S. political uncertainties are unusually high. Protectionist measures could bring new headaches.
As for the rest of the world, some might see the UK as a lemming rushing into unchartered territory. Making sense of this would require a separate fable. Meanwhile, the Japanese growth outlook continues to improve. Domestically, Japanese consumers remain critical. Encouragingly, the labor market looks very tight. Japan is also benefiting from higher demand for its exports. One reason is that emerging markets are stabilizing and have generally seen a pick-up in productivity growth. This appears partly due to recent structural reforms in many places, including South Korea and India. The outlook remains murky in Brazil but Russia is experiencing a modest recovery.
And then, there is China, of course, where the latest data has been mixed. Still, the Chinese dragon now appears to be gliding into a new stable flight path, after three years of losing altitude. We expect growth of about 6.5% in 2017 and 6.3% in 2018. Familiar challenges remain; there are plenty of things that could make the dragon sneeze. Right now, though, the U.S. looks a more likely source of volatility than Beijing. The next few rounds in the never-ending race between the U.S. hare and the European turtle look more open than usual. This key verdict underpins much of our 12-month outlook, including our currency forecast.
The UK and the U.S. are already close to full employment. By contrast, the Eurozone could still create plenty of jobs, without triggering inflation.
Source: Bloomberg Finance L.P.; as of 6/21/17
Eurozone inflation remains well below the ECB target of close to 2%. Thanks to loose monetary policies, deflation appears to have been defeated.
Sources: Bloomberg Finance L.P., Deutsche Asset Management Investment GmbH calculations; as of 6/21/17