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.