A synchronised global economic upswing
All major economies are growing for first time since 2007
Amid the gloom and doom that characterises a lot of commentary about our world today, we think it worth noting that the global economy, by one measure at least, is in the best shape it has been in since 2007.
The chart below is from the Organisation for Economic Cooperation and Development (OECD) and shows whether the 45 major economies tracked by the OECD are expanding or contracting.
Source: OECD, Waverton Sept 17
For the first time since 2007 there are currently no economies contracting and 33 of the 45 countries are seeing accelerating growth.
This has investment implications which we have been exploring in our internal deliberations. We will embellish our thoughts on some of these in future pieces. But the implications include that we should not be surprised that aggregate global corporate earnings forecasts have been rising this year. That earnings strength has helped underpin equity markets. It is our expectation that this will likely continue over the balance of the year.
We have been waiting a long time for the global economy to respond to the extraordinary levels of stimulus that have been thrown at it from Quantitative Easing and negative interest rates. Indeed there are still 20 countries (Japan plus 19 in Europe) where 2-year bond yields are negative.
Given this starting point, we should not be surprised that investors expect interest rates to rise. The Bank of England may raise interest rates in November and the market now expects the US Federal Reserve to raise interest rates in December . The Federal Reserve will also slow its purchase of assets. The European Central Bank is unlikely to raise rates but it may taper its purchase of assets too.
We are not troubled by this given that monetary policy tightening in the face of strong growth is rational. In most economic cycles the initial period of monetary policy tightening tends to be seen by the market as confirmation of the economic strength that is good for corporate earnings and by extension equity market prices.
We would be more concerned if inflation stayed high and forced central banks to become more aggressive in raising interest rates. Some recent inflation reports in both the US and UK showed inflation higher than expected by the market. But we see little sign of wage inflation picking up on either side of the Atlantic and without that we would expect to see the current blip up in reported inflation as transitory.
There are always risks to consider but sometimes investors and forecasters can be too pessimistic. One such area at the moment may be the widespread pessimism about policy making in the United States.
Immediately after the November 2016 US elections investors were buoyed by hopes that President Trump would enact reflationary fiscal policies such as tax cuts and infrastructure spending. Clearly 2017 has seen disappointment with the lack of progress on those policies. We do however think that recent actions taken in Washington make future progress more likely. In particular the impact of General Kelly as White House Chief of Staff has seen a streamlining of White House decision making that should aid policy making.
And in the House of Representatives the upcoming 2018 elections will focus minds. The entire 435 member House of Representatives face election every two years. The Republican Party currently has a majority in the House, as it does in the Senate. That House majority is under threat as the Democrats only need to win 24 seats to take control.
Critical to the Republican hopes is getting people who voted for Trump to turn out to vote in these mid-term elections when the President is not on the ballot. The best way to facilitate that is to have some policy to point to consistent with the Trump voters’ wishes. Those wishes include fiscal stimulus from some combination of tax cuts and infrastructure spending. We think this reality is underestimated by investors and commentators on Washington policy making. Were the President and the House Republicans able to come to an agreement on corporate tax cuts, for example, we would see that as likely to keep investors positive about the growth outlook globally given the size and importance of the US economy.
By William Dinning
Head of Investment Strategy & Communication
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