Source: Bloomberg, ECB
It is not just the western economies we need to monitor, but global developments, too. Last week I also attended in London the release of the new economic outlook for Asia by the Asian Development Bank (ADB). They see 60% of global growth coming from Asia this year and next. Japan is expected to grow 1.4% this year and 1.0% next but the ADB’s main focus was on the other 45 countries across the region. These are referred to as “developing Asia” and are expected to grow 6% in 2018 and 5.9% in 2019. This is not too dissimilar to the 6.1% seen last year when, according to the ADB, Asia enjoyed a “synchronised resurgence in 2017”. Export growth is expected to be strong in the first half of this year, and then slow, but perhaps more importantly for the global outlook, domestic demand is expected to be the main driver of economic growth across Asia.
Noteworthy is that the shift in China from export-led to domestically driven growth continues: consumer spending is expected to account for 60% of growth in China this year. This was evident in official data released earlier this week that showed China grew 6.8% in the first three months of this year, above the government’s 6.5% target.
The ADB, meanwhile, expects India to be the fastest growing large economy, accelerating slightly in 2018 and 2019. Inflation, however, is expected to rise across Asia from 2.3% last year to 2.9% for this year and next. While there are always risks, one message was that, “Improved fiscal and financial positions bolster developing Asia’s resilience to shocks.”
So, the message is solid growth across Asia – and a big and growing market for western economies and companies to sell into. Asia’s growth will also help global growth. It may add to the attraction of emerging markets for global investors.
Much to consider for markets
There is much for the financial markets to focus on in coming months. The International Monetary Fund (IMF) has just released its latest view of the world economy to coincide with its half-yearly meeting in Washington. They have kept with the upbeat forecasts they announced in January, seeing global growth of 3.9% both this year and next, versus 3.8% in 2017 and 3.2% in 2016, but they warned that they are watching closely the same downside challenges to growth that we mentioned at the beginning of this piece.
For the markets, too, the current geopolitical focus on the Middle East will be joined again by a focus on North Korea in coming weeks. Also, there is the next phase of the trade dispute between China and the US. And, of course, the next round of the Brexit talks, too.
Interestingly, in this environment of heightened risks, sterling has rallied – both versus the dollar and on its trade weighted basis (of which the euro is a large component).
Source: Bloomberg, Bank of England
If this continues, it will reinforce the downward trend of inflation that is already underway, but it could unwind some of the positive news seen on export growth. This will add to the conflicting challenges on the Bank of England as it contemplates raising interest rates again in coming months. That being said, a rate hike in May still seems likely.
Data this week showed UK wage growth (2.8% annual rate, excluding bonus payments) outstripping annual inflation for the first time since early last year. This trend looks set to continue, underpinning spending. Annual inflation decelerated to 2.5% in March, in line with our view that it will ease significantly during this year, and help push UK economic growth towards 2%, in excess of current market expectations.
Overall, global growth has been solid over the last year. Neither an acceleration or a collapse looks imminent. The primary question is whether growth will consolidate or slow in the face of trade and geopolitical risks and the desire of central banks to normalise monetary policy and consequentially whether corporations can deliver or beat their earnings expectations, giving support to equity markets. While it is vital to monitor such risks and to see how events unfold in coming months, there are still enough reasons to be positive about global growth.