Nanyang

Starbiz

Nanyang

Executive Summary

A. GLOBAL ENVIRONMENT

• Moderate global growth continues amid challenges. The global economy is still muddling through in a slow and weak mode. While most stock markets and currencies have recouped the losses suffered from post-Brexit turmoil, high-frequency indicators suggest that global growth continues, but at a moderate and uneven pace going into the second half-year of 2016 and in 2017. In its World Economic Outlook (WEO) October report, the International Monetary Fund (IMF) maintained global output growth estimates at 3.1% in 2016 and at 3.4% in 2017, the same as in early July shortly after taking into account the short-and medium-term impact of Brexit on the world economy.
• Continued growth divergence. Growth in the United States picked up, albeit still weak in 2Q while the eurozone’s economic recovery has lost some steam. Japan’s growth nears stalling, prompting more fiscal and monetary stimulus. China’s stable growth in 1H16 seems to show some incipient signs of weakness, reinforcing the persistent worries of an “L-shaped” recovery.
• Ultra-monetary accommodation remains, albeit limited effects. The persistent slow global growth means that low interest rates and yields will remain depressed for a longer while. Negative interest rates could go deeper for some central banks to avoid growth stagnation and deflation risk. Regional central banks mostly stay on the sidelines with the monetary policy leaning towards easing.
• Risks to outlook. Multiple events and uncertainties are still casting a shadow on the global economy and financial markets. 1) The Fed’s forward guidance on the US interest rates direction; 2) lingering risks and unresolved issues post the United Kingdom’s referendum decision to leave the European Union (Brexit); 3) a disruptive China’s economic rebalancing process and the risks of Chinese renminbi devaluation; and 4) the US Presidential election on 8 November.

Executive summary

A. GLOBAL ENVIRONMENT

• Brexit raises global recession fears. Amid still-slow and weak global growth, the Brexit’s aftershocks have cast a doubt over the global economy. There remains a lot uncertainty over the precise impact of Brexit on global financial markets and economy, particularly in the United Kingdom (UK) and European Union (EU). However, it is comforting that major central bankers have taken all necessary steps to contain the risk of a global financial contagion as well as to avert a sharp slippage in global growth.
• Mixed performance in advanced and emerging economies. The US economy is somewhat stabilizing but not that exciting. The moderate growth in eurozone will be challenged by negative spillovers from Brexit. Japan’s economy continues to mire in stagnation even if policymakers step up stimulus measures. The ongoing rebalancing of China’s economy hit the growth target in 1Q16 amid worries of an “L-shaped” recovery.
• Will Brexit recalibrate global monetary policy? Major central bankers are facing competing interests. Brexit may force stretched central banks to do more with less given the limited monetary space. The Bank of England (BoE) and European Central Bank (ECB) will have to do more monetary easing. The US Federal Reserve (Fed)’s forward guidance of future interest rates hike not only will be data dependent but also weighs on the Brexit’s impact on global economy. Some Asian central banks might err on the side of monetary easing.
• Key events to watch. Global financial and economic scenarios will continue to be shaped and influenced by a number of key events or policies uncertainty. i) The Fed’s forward guidance of interest rates direction; ii) the cloud of uncertainty surrounding the UK leaving EU; iii) a disruptive China’s rebalancing process; iv) the unexpected large devaluation of Chinese renminbi; and v) the US Presidential election on 8 November.

Executive Summary

A. GLOBAL ENVIRONMENT

• A broad-based global recovery. Our global growth assessment continues to look favourable. The global economy is rebounding, with both advanced and emerging economies registering improved growth, supported by continued gains in manufacturing, recovering global trade and higher exports as well as firmer commodity prices. The International Monetary Fund (IMF) anticipates the global economy to remain on expansion track, keeping its April’s growth projection of 3.5% in 2017 and 3.6% in 2018.
• Global financial markets continued to rise on optimism and confidence. Amid lingering concerns about policy uncertainty and risks as well as periodic bouts of geopolitical tensions, global bond yields though have ticked higher but the levels remained below the peak. Equity markets in advanced economies and emerging markets continued to remain upbeat, signalling continued market optimism about macro prospects and corporate earnings as well as some compression of interest rate spreads. In summary, markets shrug off a number of political and geopolitical impasses.
• Accelerating economic activity in advanced and emerging economies. High frequency data, namely purchasing managers’ indices (PMI) for manufacturing and services show continued strength; steadying growth in industrial production and trade; and global chips demand firming up. All these point to continuing expansion of global activity going forward. Growth in the US economy has strengthened, backed by consumer spending and investment. Recovery in eurozone and Japan have firmed up. China’s growth remains resilient, helped by previous policy easing and supply-side reforms. Nevertheless, the rise in debt must be closely watched and contained to prevent systemic risk in China’s financial system.
• Will benign inflation derail global central banks’ monetary policy agenda? The soft inflation numbers for the US raises a debate on whether the Federal Reserve (Fed) should continue to tighten interest rates whilst preparing to shrink its balance sheet. We are convinced that the Fed will raise interest rates gradually so as not to disrupt the strength of economic recovery. The Fed has embarked on the winding down of its US$4.5 trillion balance sheet in October, marking a significant policy shift to gradually remove its quantitative easing (QE) program initiated in 2009. The European Central Bank (ECB) has for many months stated that rates will only start to rise well after the horizon of net asset purchases has come to an end. Bank of Japan (BOJ) had pushed back the timing of achieving its inflation target of 2.0% for the sixth time, signalling negative interest rates will remain intact in the foreseeable future.
• Medium-term risks still prevalent. Policy uncertainty in advanced economies if prolongs will present a big risk to inflict volatility in financial markets and exchange rates. Rich market valuations raise the likelihood of a market correction should there is a policy misstep or a protracted period of policy uncertainty, which could dampen growth and investors’ confidence. The policy uncertainties and financial volatility are associated with the impact of the Trump’s fiscal stimulus and regulatory, the path of the US monetary policy, the size and pace of the Fed’s balance sheet reduction, negotiations of post-Brexit arrangements, inward-looking policies that hinder global trade and market reforms. Rising geopolitical tensions can also weigh on market confidence and economic growth.

Executive Summary

A. GLOBAL ENVIRONMENT

• Still going steady. Despite the US economy started on a weak note in 1Q17, which is not unusual, the global economy should stay on course to show a better performance this year. High frequency current and lead indicators, namely, the OECD Composite leading index, global Purchasing Managers’ indices for manufacturing and services as well as semiconductor sales continued to firm up, cementing positive optimism about the global growth. Investors’ optimism in global equities generally remained intact. Bouts of market volatility associated with intermittent doubts about the Trump’s shaping of economic policies, especially the outcome of the inward-looking policies and much awaited tax reforms. Some controversial issues surrounding the White House also spooked the market.
• 2017-18 global growth estimates tweaked higher. The International Monetary Fund (IMF) raised global growth forecast for 2017 but warns about protectionism. Global growth is expected to reach 3.5% this year (from 3.4% previously) and 3.6% in 2018. However, the IMF warned that risks to global growth remain to the downside with structural issues such as low productivity growth and high-income inequality holding back economic development. Pressures for the inward-looking policies are increasing in advanced economies. The US economy is expected to expand 2.3% this year, up from 1.6% in 2016. China's growth forecast is raised to 6.6% in 2017 and 6.2% in 2018. However, it warned the economy is over-relying on government stimulus and credit to maintain growth. The persistent resource misallocation raises the risk of a disruptive adjustment in China.
• Global central banks’ dovish comments signal an end to easy-money era? Though the Federal Reserve (Fed) is on track to move interest rates at a measured pace, it remains a challenging task for the Fed to continue normalising its interest rate whilst shrinking its balance sheet so as not to disrupt the economic recovery. The speed at which the Fed raises interest rates will depend on the level of fiscal stimulus and tax reform creates significant inflationary pressure. In the eurozone, the ECB removed reference to further rate cuts though it is too early to end its asset purchase programme. Bank of Japan offers no hint of future rate rises as it battles to reach the inflation target of 2.0%.
• Political, policy, regulatory and geopolitical risks at play. The threat of protectionism, the unexpected aggressive stance of the US monetary policy, regulatory barriers, geopolitical tensions in the Middle East, domestic political scenes in some advanced economies, including the on-going UK Brexit negotiations as well as rising terrorism threats represent a substantial drag on the global economic outlook.

Executive Summary

A. GLOBAL ENVIRONMENT

• Off to a good start in 1Q 2017. The global economy seems to show some growth traction going by the performance of global equity markets as investors’ sentiment and market optimism was buoyed by expectations that the Trump administration’s reflationary policies will lift the growth prospects of the global and US economy as well as better corporate earnings. Other bright spot is the firming of global crude oil prices to around US$56 per barrel before easing off in recent weeks, cementing positive effect from the OPEC’s oil output cut deal. Despite the upshot to optimism, material risks could emanate from faster Fed’s rate hikes, diminishing hopes of the US fiscal stimulus and the threat of trade protectionism amid a plethora of policy and political uncertainties.
• Higher global growth expected. Our tracking of high frequency global lead and forward indicators underpin a better year ahead, albeit still moderate. The International Monetary Fund’s (IMF) estimated global growth of 3.4% in 2017 (3.1% in 2016) and 3.6% for 2018 is still a distance from an average growth of 4.2% in 1998-2007. The US growth is picking up steam and the improved outlook in Japan is expected to offset the still moderate pace of growth in Europe. China’s growth and financial stability remained in focus as the government continues its economic rebalancing whilst ensuring financial stability and containing macro risks.
• Higher inflation risk, tighter monetary policy ahead? Has the tide turned? Better price prospects for oil and commodities, strong dollar’s appreciation against most major foreign currencies as well as firmer wage growth could lift inflation risk and may threaten the central banks’ price stability target in advanced economies and some emerging economies. Will the anticipated inflation risk prompt a radical gear shift in the advanced economies’ monetary policy, which will bring to an end of negative interest rates by Bank of Japan (BoJ) and the European Central Bank (ECB)? The upshot could come from the US Federal Reserve, which may be forced to embrace faster pace of rate hikes this year from the expectations of 2-3 hikes currently.
• A balancing act of headwinds and tailwinds. Trade protectionism mindset, the Fed’s interest rate upcycles, rising US dollar and hopes for the Trump administration’s reflationary policies – tax cuts and increased fiscal spending – are setting the global agenda. While the year 2017 started off on a pretty well footing, certain threats and risks still warrant close monitoring. Among these include potential ramifications in relation to the Trump administration’s trade and economic policies, the risk of stumbling blocks in the UK’s Brexit negotiations, which was triggered on 29 March 2017, the economic and financial disruptions in China triggered by the blow up of debt and banking crisis. In terms of political risks, the wave of political changes will continue unrelentingly in some European countries in 2017.

Executive Summary

A. GLOBAL ENVIRONMENT

• The year 2016 ends on a moderate pace. Global lead and forward indicators continued to indicate the global economy would end the year 2016 on a moderate note. The IMF’s estimated global growth of 3.1% in 2016 marks the sixth consecutive year of slow growth since 2011 when compared to an average growth of 4.2% in 1998-2007. During the year, we have witnessed periods of volatility in global financial markets and emerging markets’ currencies as inflicted by the ongoing political, policy and economic uncertainties in major advanced economies. In just the last six months, the world has had two “black swan” events (Brexit and Trump’s victory) triggered sharp market reverberations, albeit shortlived.
• Global growth improves but downside risks remain. Growth in G-3 showed some traction, with the United States leading the pack, followed by a moderate growth in eurozone, which defies the gravity of post Brexit’s impact and Japan’s moderate recovery despite the strong yen. China’s economy is in cruising speed, underpinned by continued expansion of private consumption and services.
• Better growth performance in 2017. A slew of high frequency indicators lends credence to the continued expansion of global economy though not that exciting. In a quarterly update to its World Economic Outlook, the International Monetary Fund (IMF) maintained its forecast for global growth of 3.4% in 2017 (3.1% in 2016) and 3.6% for 2018, unchanged from the Fund’s previous forecast in October. The World Bank forecasts global GDP growth to increase by 2.7% in 2017 compared to 2.3% in 2016.
• The Fed sees three interest rate hikes in 2017. The Federal Reserve (Fed) hiked its key interest rate for the second time since Dec 2015 to 0.50-0.75% at end-Dec 2016. Key indicators lend credence to the US recovery is firmly in place to warrant for small rate increases ahead. In 2017, the Fed will have to balance its interest rate hikes between supporting stronger economic growth coming from Trump’s reflationary fiscal stimulus and to tame inflationary expectations. Our base case expects the Fed’s interest rates to reach 1.25-1.50% at end-2017.
• Headwinds outweigh tailwinds in 2017. 2017 will be yet another challenging year for the world economy. The shaping of Trump’s economic plans and the intended impact on the US economy as well as the calibration of the Fed’s monetary policy, including its forward guidance on interest rates would remain in high focus. Other key events and developments to watch are the political outcomes of some major European countries (France, Germany and Netherland) that will be having their national or Presidential elections as well as the lingering unresolved issues associated with post Brexit. Investors will still be paying close attention to China not only about its growth trajectory but also growing concerns about its high debt exposure as well as the direction of Chinese renminbi as Trump has labelled China as a currency manipulator.

Executive Summary

A. GLOBAL ENVIRONMENT

• Global growth continues rising. The global growth outlook remains positive. The sustained improvement in global trade and manufacturing reinforces the strength of domestic demand in advanced economies. Confidence indicators continued improving, buoyed by unrelenting rallying in global equity markets and the confirmation of historic tax reforms in the US as well as tentative positive progress of the UK Brexit negotiations. The International Monetary Fund (IMF) estimated global growth to increase by 3.7% in 2018 (3.6% in 2017).
• Advanced economies going steady. The US economic expansion is increasingly broad based across sectors, powered by a tightening labour market. The economic recovery since the 2007-2009 recession is now in its eighth year and showing little signs of fatigue. Growth in the eurozone continues to expand solidly, albeit mixed between some economies while Japan's economy grew for the seventh straight quarter in 3Q17, its longest expansion since 2001, backed by rising business investment and a recovery in exports. China's economic restructuring growth still steadying though the authorities would continue to rein in credit growth and control debt without hurting the growth.
• Global liquidity conditions will tighten gradually. Going into 2018 and beyond, global financial conditions will tighten further as the Fed continues its forward guidance of measured pace of interest rate hikes and continued shrinking of balance sheet. A gradual reversal of ultra-monetary stimulus is not expected to pose a major drag or shock to asset values.
• Keep a close watch on inflation. Another closely watch indicators are headline and core inflation in advanced economies. They are seemingly looking benign or even falling in some months, and are still not hitting the central banks’ target of annual inflation rate of 2.0%. While the positive supply shocks via technological innovations, low commodity prices and slack capacity had helped to ease inflation pressure, but the inflation will eventually catch up if the output gap narrows and the slack in product and labour markets diminish as the economy strengthens and demand gets stronger.
• Global economic risks in 2018. One potential shock that has received much attention relates to the pace of the Fed’s monetary tightening if the risk of inflation is underestimated in months ahead. Rich asset valuations raise the likelihood of a market correction should there is a policy misstep or a protracted period of policy uncertainty, which could dampen growth and investors’ confidence. And looming in the financial stability risk is a mountain of non-financial debt that makes markets nervous and increases the system’s vulnerability to destabilizing shocks. Other key risks are the on-going Brexit negotiations, inwardlooking policies that hinder global trade and market reforms. Rising geopolitical tensions can also weigh on market confidence and economic growth.