In­vestor op­ti­mism, global re­al­ity may clash in 2017 GLOBAL ECON­OMY YEARAHEAD

Kuwait Times - - BUSINESS -

LON­DON: In­vestors sound op­ti­mistic about a break­out for the world econ­omy next year, but for all the talk of huge tax cuts from the in­com­ing US pres­i­dency of Don­ald Trump, the eco­nomic out­look looks sim­i­lar to 2016: un­even and un­spec­tac­u­lar. Ac­cel­er­at­ing in­fla­tion and a soar­ing US dol­lar as the Fed­eral Re­serve raises in­ter­est rates are also risks to the eco­nomic bal­ance, mag­ni­fied by that pend­ing stim­u­lus.

Much may hinge on fi­nan­cial mar­kets, which for a brief pe­riod around the start of this year looked like their fret­ting over China might throw the global econ­omy off track. There is plenty more un­cer­tainty about trade with China now than then. So, many of the sev­eral hun­dred pro­fes­sion­als polled by Reuters world­wide say the global trade slow­down dur­ing the world econ­omy’s luke­warm re­cov­ery from fi­nan­cial cri­sis that started nearly a decade ago could worsen.

Emerg­ing economies will re­main vul­ner­a­ble. Brazil’s per­sis­tent, crip­pling re­ces­sion is way out of line with its soar­ing stock mar­ket, and much of Asia will grow below po­ten­tial, putting the lat­est global growth fore­cast for the year ahead at 3.2 per­cent, less op­ti­mistic than it was this time last year.

For the de­vel­oped world, mean­while, it has been pro­duc­tiv­ity gains that have been lack­ing for so long and pol­i­cy­mak­ers re­main at a loss on the rea­sons why, and how to rem­edy the prob­lem.

The US job­less rate is al­ready down to 4.6 per­cent and hir­ing slow­ing, so economists say im­prov­ing growth in out­put per worker will be cru­cial for pros­per­ity. “Mr Trump and his team have promised growth of 3.5 to 4 per­cent or more, which we see as ‘mag­i­cal think­ing’ un­less ac­com­pa­nied by ac­cel­er­ated pro­duc­tiv­ity growth,” noted Michael Carey, U.S. econ­o­mist at CA-CIB in New York.

Mar­kets out of step

The most op­ti­mistic US growth fore­cast for any point in 2017 in a Reuters poll taken a month af­ter Trump’s shock elec­tion vic­tory was 3.8 per­cent, well short of the peak rate in a busi­ness cy­cle that is al­ready ma­ture by past stan­dards. The con­sen­sus, in line with the Fed’s view, is a lit­tle above 2 per­cent. That is sim­i­lar to a Reuters poll out­look for 2016 in a se­ries of fore­casts made a year ago on growth, rates, in­fla­tion and for­eign ex­change that were broadly ac­cu­rate.

Such luke­warm growth does not com­pute with another set of wildly bullish stock mar­ket views, al­though it is clear many strate­gists who ini­tially said Trump would be a threat to mar­kets have abruptly changed their minds since the elec­tion.

Strate­gists fore­see a ris­ing US dol­lar, al­ready at a 14-year high, and US Trea­sury yields edg­ing up as the Fed fol­lows through with more rate hikes next year. But Wall Street isn’t con­vinced yet there will be three more.

A ris­ing dol­lar may blunt fu­ture per­for­mance of US com­pa­nies, many de­pen­dent on in­ter­na­tional busi­ness for rev­enue. Many of their share prices trade near record highs, but propped up by buy­back schemes and stim­u­lus, not busi­ness in­vest­ment. Dol­lar strength, weak­en­ing other cur­ren­cies, will also in­flu­ence how emerg­ing mar­kets man­age rel­a­tively higher in­fla­tion, as well as wilt­ing busi­ness con­fi­dence.

But for all the talk of trade bar­ri­ers, oil prices ris­ing on sup­ply cuts, and planned US tax cuts and in­fra­struc­ture spend­ing, the global in­fla­tion out­look hasn’t changed much, even if the Fed is sound­ing more wor­ried about it. The Fed’s pre­ferred in­fla­tion gauge is fore­cast to av­er­age 1.8 per­cent next year, in line with its own view.

Po­lit­i­cal risk ris­ing

The world’s sec­ond largest econ­omy, China, has turned up slightly this year, but built on a govern­ment bor­row­ing binge and a partly-man­aged weaker cur­rency. Growth is fore­cast to slow, and ten­sions be­tween Beijing and the in­com­ing Trump ad­min­is­tra­tion are al­ready flar­ing.

Even In­dia’s econ­omy - the fastest­grow­ing in the world this year - is brac­ing for a growth hit from a rad­i­cal govern­ment move to re­place huge swathes of its cur­rency in cir­cu­la­tion. One bright spot is the re­cent ac­cel­er­a­tion in euro­zone growth as the Euro­pean Cen­tral Bank con­tin­ues buy­ing tens of bil­lions of euros worth of bonds each month, keep­ing the euro un­der pres­sure and mak­ing ex­ports rel­a­tively cheaper.

But elec­tions in Ger­many, France and the Nether­lands threaten to fur­ther chal­lenge the sta­tus quo just as eco­nomic ef­fects from ex­pected for­mal di­vorce pro­ceed­ings start to ap­pear af­ter Bri­tain’s shock vote in June to leave the Euro­pean Union. The po­tency of global mone­tary pol­icy is fad­ing too, and fur­ther out of synch with the Fed’s tight­en­ing cam­paign. The ECB and other ma­jor cen­tral banks like the Re­serve Bank of In­dia and the Cen­tral Bank of Brazil, are ex­pected to ease more. — Reuters

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