As a matter of fact, part of the so-called “reflation trend” was more the result of a cyclical and temporary change in China’s economic policy. Beijing’s decision to ramp up infrastructure spending prompted state-controlled companies to increase capital investment by 21% last year, leading to a 15% jump in commodity prices between August 2016 and February 2017.
International trade benefited from the improved terms of trade of commodity- exporting countries and from an upturn in the manufacturing cycle, which still hinges on business investment. Meanwhile the dollar’s appreciation and the rise in interest rates that followed Trump’s election limited US GDP growth in the first quarter of 2017 and there is still no calendar for implementing the tax cuts he has promised, as we forecasted.
In the coming quarters, global GDP growth could be slowed by the recent pullback in commodity prices.
In the coming quarters, global GDP growth could be slowed by the recent pullback in commodity prices. What is more, the actual impact of tax cuts on the real American economy won’t be seen until the beginning of 2018 at the earliest, as we already integrated in our forecast.
The downturn in GDP growth should nevertheless be cushioned by the boost that a decrease in inflation should give to household consumption in the US and the eurozone and by the persistently low interest rates. .
As a consequence we still expect a moderate rise in US GDP growth to 2.1% this year following the 1.6% pace clocked in 2016. In 2018, if part of the Republicans’ programme of tax cuts is implemented, expansion should accelerate further to 2.5% by our calculations.
Meanwhile the eurozone will benefit from a monetary policy that remains highly accommodative, from continually rising public expenditure and, most importantly, from the European Central Bank’s (ECB) new-found ability to set interest rates independently from the US monetary policy. These will therefore be more consistent with the area’s macroeconomic fundamentals.
Moreover, the ECB continues to put pressure on banks to shore up their balance sheets by eliminating non-performing loans, a process that should enable the eurozone to ward off the spectre of Japanese-style deflation permanently according to our analysis. All this supports our forecast of 1.7% GDP growth for the area this year that will edge up to 1.8% in 2018. Finally, since Brexit is mainly a British problem, it is not likely to destabilise the eurozone. The EU has already demonstrated that it can set the calendar and terms of its negotiations with the UK. As for the emerging countries, their GDP growth should reach 4.6% in 2017, up from last year’s pace of 4.1%, despite the recent downturn in commodity prices.
In both 2017 and 2018, the rising debt-to-GDP ratio should continue to weigh on global GDP growth, which is also an increasing source of instability. Nevertheless, core inflation should remain weak which is likely to give room for manoeuvre to central banks to maintain dovish monetary policies and avoid having to raise interest rates too far too fast.
Group Chief Economist
For a broader perspective, readers can find our full macroeconomic analysis in “Macroeconomic Forecasts No. 3”.
This analysis is an extract from the first House View published by Edmond de Rothschild.
This publication presents Edmond de Rothschild’s key convictions for macroeconomics, asset allocation strategy, and the principal asset classes.
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