Strategy & economics
Chart of the month - January
Janet Mui, Global Economist, reviews the 'synchronised global growth' of 2017 and how this is expected to continue throughout 2018
The Year of the Fire Rooster lived up to its fiery characteristics, with 2017 concluding as a year of renewal and enthusiasm for the global economy. 'Synchronised global growth' was one of the most talked about topics in the investment community in 2017, and for good reason, as growth in both advanced and emerging economies accelerated for the first time since 2010. For 2018, the Year of the Dog, a key question is whether this synchronised growth backdrop will be sustained. We think it will.
2018 has kicked off with a strong round of economic releases, this confirming a continuation of broad-based growth. In the US, small business confidence remained robust and the trend in durable goods orders strengthened. In the Eurozone both business and consumer confidence were at a 17-year high, while the new orders index of the composite purchasing managers’ index (PMI) expanded at the fastest pace in a decade. For Japan, the surprise strength in machinery orders at year-end pointed to solid capital spending ahead. Emerging markets have seen a benefit from the increased demand from developed markets, resilient Chinese growth and the strong pick-up in commodity prices. While the UK market was a laggard amongst major economies in 2017, the outturn was much better versus expectation thanks to the boost from net trade.
In 2018 we expect global growth to expand at around the same pace as last year, with potential to surprise positively. We think the US in particular has the biggest potential for a surprise increase in growth. The boost from US tax reform and the strength in economic fundamentals are being under-appreciated. On the corporate side, tax cuts and immediate expensing of capex will be a catalyst for reviving the investment cycle, amid capacity constraint and recruitment difficulty. If investment does kick off, it will provide a much needed uplift to productivity growth. Personal income tax cuts and the wage/bonus increases by many corporates post tax reform announcement will directly increase spending power for households. Meanwhile, the personal savings ratio continued to fall due to improved economic confidence, and household net worth hit a record high thanks to buoyant equity markets. Externally, a weak US dollar and strong global growth will be supportive to net trade and US corporate earnings. Last but not least, the rally in oil prices will mean a major boom for energy related employment and capex - sectors which have an increased economic importance since the shale revolution.
Our positive expectations of the US economy reinforces our constructive view on inflation. We think both US headline and core inflation look set to grind higher in the US during 2018. The increase in inflation will partly reflect the unwinding of some temporarily weak factors, the impact of higher energy prices and the continued tightening of the labour market. The Federal Reserve (Fed) has pencilled in three interest rate increases in 2018. Should there be a surprisingly large increase in inflation, there is the potential for a more hawkish policy reaction from the Fed.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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