16 April 2018

Could the sweet spot turn sour?

The global economy seems to be in a sweet spot.

Global Chief Economist, HSBC

The world is participating in a synchronised upturn: growth is very robust by post-crisis standards and unemployment is falling. So what could go wrong?

Sometimes synchronised growth sows the seeds of its own destruction: a monetary response to higher inflation can trigger a shock to markets or economies, for instance. But 2018 should be another solid year of global expansion – even if growth has peaked in the eurozone and Japan, emerging markets should pick up marginally.

Washington’s tax and spending plans have lifted our US forecasts slightly. But normally, when unemployment is sliding towards 4 per cent the US has run a budget surplus, not a widening deficit. That limits further fiscal manoeuvres if there is a downturn and could pose other long-term risks as the current account continues to widen. For now, however, the plans boost domestic demand.

A big acceleration in global inflation is not imminent. Our 2018-19 inflation forecasts are higher than in 2017 but still well below the rates before and after the financial crisis.

We expect global growth of 3.0 per cent this year and 2.9 per cent in 2019. Emerging-market countries are forecast to average growth of 4.7 per cent this year, followed by 5.0 per cent in 2019, while developed markets slow from 2.2 per cent to 1.9 per cent. But that is much less divergence than seen during previous synchronised upturns.

In large parts of Asia, the pass-through from stronger export growth to consumer spending has been more muted than previously. In part this is because credit growth has slowed and some of the fastest-growing sectors, such as electronics, employ fewer workers and spend less on wages than some of the larger slower-growing sectors.

On monetary policy, we expect two more interest-rate rises from the US Federal Reserve this year and the European Central Bank finally to halt quantitative easing. However, for most emerging economies and some smaller G10 countries, low inflation and much-improved balance of payments positions mean they are under less pressure to follow the Fed than during previous synchronised upturns – as long as the dollar remains weak. If interest rates rise faster or the dollar appreciated strongly, it could be a different story.

Monetary policy is not the only risk to high asset values. Government policies, rather than fears of higher interest rates or inflation, could hit financial markets. Some labour-market policies seeking to alter the distribution of economic gains and curb anger at income inequality might actually support long-term growth. However, others – such as immigration controls and protectionism – could potentially lift near-term inflation but ultimately be bad for growth.

With the US administration apparently opting for protectionism, the risk is that tit-for-tat trade measures quickly escalate. The US and China are the world’s two largest importers, accounting for nearly a quarter of global import demand. If they impose retaliatory sanctions, the impact on world trade could seriously dent growth prospects in the export-driven surplus economies.

 

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