SEB: Late-Cycle Growth Forces Lifting Global Economy

Late-cycle growth forces are lifting the global economy, which will expand faster than the historical average throughout our 2017-2019 forecast period, according to Skandinaviska Enskilda Banken AB (SEB) economists writing in the September 2017 issue of the quarterly Nordic Outlook re­port.

But forecasts point to a complex balancing act between dramatic political events and classic cyclical issues such as the sustainability of growth, the re­source situation and inflationary forces, according to the economists.

Despite dark political clouds, activity has surprised on the upside in many economies - for example in China, Japan and the euro zone as well as in the Nordic and Baltic countries - driven by ever-stronger labour markets, rising resource utilization, increased trade and higher asset prices.

Aside from greater geopolitical risks, there are also major social challenges such as economic inequality, aging populations and sectoral job losses due to digitization and automation.

GDP growth in the 35 mostly affluent countries of the Organisation for Economic Cooperation and Development (OECD) will reach 2.1 per cent this year and in 2018, then slow to 1.9 per cent in 2019.

Central banks are encountering diminished deflation and recession risks. There are reasons to keep pursuing expansionary monetary policy, but it is becoming increasingly hard to justify its more extreme forms.

Since 2008, central banks have created a money surplus of about 15 trillion US dollars, equal to 20 per cent of global stock market capitalization. This will increase to about USD 16 trillion by the end of 2018.

Monetary policy will thus maintain its expansionary direction during our forecast period, but with steps towards continued normalization (US Federal Reserve), reduction/phase-out of stimulative bond purchases (European Central Bank, Riksbank) and gradual key interest rate hikes (ECB, Riksbank, Norges Bank, Bank of England).

It is debatable whether the Phillips curve - which posits an inverse relationship between the unemployment level and the inflation rate - can serve as a policy anchor and communications tool for central banks, but studies by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), as well as SEB’s own estimates, conclude that this relationship persists - though weakened.

Inflation will thus move slightly upward in 2017-2019 amid continued challenges to achieving inflation targets. A combination of improved growth prospects and expansionary monetary policies will provide continued support to stock markets.

Labor market offsetting Trump's foreign policy rhetoric and changeability

In the United States - as expected - the political turbulence surrounding President Donald Trump's administration is not affecting the economy significantly, and tax cuts will not be enacted in 2017.

GDP growth will reach 2.2 per cent in 2017 and 2.4 per cent in 2018, then fall to 2.0 per cent in 2019 due to rising interest rates and worsening bottleneck symptoms.

The federal debt ceiling will be raised this autumn, but the White House will continue to have difficulty in pushing through its political program.

The labor market is strong, with job growth more than twice as fast as needed to keep up with population growth. Unemployment will fall below 4 per cent and pay increases will slowly move up towards 3.5 per cent yearly by the end of our forecast period.

The Federal Reserve will hike its key rate one more time this year, three times during 2018 and once in 2019 to 2.50 per cent, a level that is below what the Fed now regards as normal (about 3 per cent).

The Fed will gradually reduce its monetary policy portfolio during a four-year period, which represents a cautious monetary tightening. This will provide support for a stronger dollar, but as other central banks begin to follow the Fed's example, the dollar will lose ground against currencies such as the euro; at the end of 2019, the EUR/USD exchange rate will be 1.25.

A weak dollar is beneficial to many debt-burdened emerging market (EM) economies.

EM economies accelerating after a period of slower growth

Growth curves are pointing upward in the emerging market sphere (accounting for about 60 per cent of the world economy in terms of purchasing power parities, PPP), with overall GDP in the sphere accelerating from an 4.3 per cent increase in 2016 to around 5.0 per cent in 2017-2019.

Beijing is now orchestrating a partly credit-related deceleration, aimed at achieving a stable economy that will make its political succession process easier.

China's GDP growth will be 6.8 per cent this year, well above the official target of about 6.5 per cent, but will fall to 6.4 per cent in 2018 and 6.1 per cent in 2019. Inflation is expected to be lower than the informal 3 per cent target.  The yuan will appreciate  during SEB’s forecast period from 6.70 to 6.40 per dollar at the end of 2019.

In India, yearly growth will accelerate to nearly 8 per cent as certain reforms are implemented.


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