Global outlook for 2017
As we enter 2017, we can comfortably say that global economic growth picking up cross the board. Reported acceleration in economic activity throughout most economies has been noticeable since November of last year. I believe that after years of underestimating the severity of the global growth slowdown, economists are now missing the strength of this noticeable rebound. The European Union could actually surprise most in that economic growth could increase sharply this year. The most recent Eurozone manufacturing activity was the highest since the start of 2014. Around the world, consumer confidence continues to return, unemployment is at a seven-year low, and the slump in retail sales that we have seen in the eurozone is seems to be coming to an end. Globally, inflation is clearly picking up and-based on recent producer price readings and the recent rise in oil and commodity prices, the underlying inflationary trend is solid. Base effects on commodities are likely to help headline prints beat forecasts and provide a proper inflation scare in the first half of the year. At least for the short term there will be a rebound in headlines inflation figures but let’s not forget that structural disinflationary pressures from technology and demographics won’t disappear.
US election, UK Brexit and the eurozone political risk have dominated 2016. Now investors are more alert to any new political risks. I think for 2017, too attention will be focused on the Eurozone as the French election campaign starts early in the year but with European economic growth picking up, investors most likely start discounting new political risks and focus on making money. During this year, European investment assets may see their risk-premium subside in anticipation of economic recovery and normalization of corporate profitability. As global economic growth picks up, the era of quantitative easing and low interest rates are drawing to a close. That could see the return of the macro themes such as relative growth trends and diverging economic policy. As central banks loosen their grip, market breakouts will have more freedom to trend and momentum players should also be happier. All these themes will be helped by the fact that banks globally are recovering and so liquidity, riskappetite and monetary policy transmission will all improve.
Two clear investment themes for 2017 are at play one rising inflation and government-spending particular in the US under Donald Trump. These two themes are related. Most governments around the world will take comfort from the US new economic policy to start spending again. This is a great excuse for some at the same time it could easily give voters the comfort at least for the time being. In all likelihood, nothing much will change in 2017. However, investor’s fixation with inflation and Donald Trump’s economic policies will push most equity indices to new highs throughout the year. President-elect Trump’s promise to double US economic growth during his term in office will need to work with established institutions to pass any of his promised policies. Those policies will require uprooting deeply entrenched interests. Reversing free trade and restoring jobs will be a slow and maybe impossible task. Forcing change on complex global supply chains and business models may be more challenging still, especially if corporate America has any say in the matter.
How much politicians are allowed to reignite inflation with new economic policies might be misplaced in today’s environment. The idea is that upcoming US tax cuts and new government spending on infrastructure, presumably financed by deficits, will soon reverse years of stagnation. This could be done in the US but can any other developed economies do a similar policy is open to question. President elect Donald Trump has promised such an agenda, and policy makers in Europe and Japan are watching closely. For reflation to take hold on the global economy, China and Japan the second and third biggest economies in the world need to do more to accelerate their economic growth. Japan, which remains mired in stagnation despite decades of such policies, shows just how hard the challenge is. A further problem is that global reflation argument depends on China’s economy growing much stronger than the 6 percent to 7 percent Gross Domestic Products that has been growing in the past couple of years. China has been supporting weakening economic growth with unsustainable debt-fueled stimulus and managed currency devaluation. China needs to do more on structural reforms and less on debt fuelling its economy.
Reflating the global economy can in the short term be good for global equities but it is likely to worsen current-account imbalances, disrupt and distort capital flows and lead to foreign exchange volatility, while a stronger dollar and higher interest rates might disadvantage some US exporters. However, a strong US$ can only be good for the overall US economy and the rest of the world. Some emerging economies should benefit from a stronger US economy and a stronger US dollar. In short, a rebound in global economic growth and inflation will prove at least in the short term good for investors. As long as a rebounding inflation is kept in check by central banks and policy makers, the financial markets will do well going forward. But if rising inflation leads to more sell off in global bonds then this might cause central banks to panic and aggressively tighten monetary policy. This is something could be bad for the global financial market.
Overall, the year has started well for the global financial market and this could continue for the time being. Equity investors should keep an eye for 2017-quarter one corporate result to find out if the year is professing well and how corporate CEO’s see the year ahead. @Rasameel