A new year, a new bright start

THE New Year has started on a happy note. Global growth remains robust, commodity prices are rising and, despite improving labour markets, inflation pressures still appear well contained.

Markets have responded to this benign backdrop with further valuation gains amid persistent low volatility.

( Geo) political threats could spoil this party, but none seem particularly imminent.

The true risk for 2018, thus, remains an unexpected surge in inflation pressures and the related re-pricing of central banks’ policy paths.

As the global expansion extends, this risk should rise over time.

However, technology-induced structural changes have also made economies’ behaviour more difficult to predict.

Global growth momentum remains robust.

December readings of global manufacturing confidence this week jumped to their highest levels since post Great Financial Crisis rebound in 2010/11.

This was led by further improvements in sentiment in the US and the euro area, while confidence in the UK, China and most emerging markets’ economies remain at elevated levels.

Notably, robust new orders, including for exports, and a widening gap between orders and inventories all bode well for manufacturing activity and trade in future months.

The recent passage of a large tax stimulus package in the US should provide some boost for activity in the world’s largest economy, even if there is scepticism about its scale and duration: we estimate the tax cut-induced impulse to real GDP growth from consumption and investment at only about 0.5pp.

While this would imply relatively modest growth rates of 2.7 and 2.3 per cent in 2018 and 2019, respectively, it would still extend the current cycle beyond the post-WWII record expansion of 40 quarters in 1991-2001.

In parallel, Japan’s growth remained robust and data in the eurozone region continue to outperform expectations, suggesting a potential acceleration in the euro area in the fourth quarter of 2017 (4Q17) and thus, the upside risk to our growth forecasts for the region.

In the same vein, China’s figures paint a picture of an onlymoderate economic slowdown, with service PMIs suggesting the sector expanded rapidly in December.

Markets expect a period of low volatility for now as major risk threatening global growth seems to be modest for now.

However, the weakening of the US dollar will erode US trade competitiveness and some may point to alternative trading currency like Chinese yuan.