US and China Drive Global Economy
April 7, 2017 | HSBCEstimated reading time: 2 minutes
U.S. interest rates have been raised twice in three months for the first time in more than a decade. Global growth is picking up and inflation has been rising. Little wonder that talk is rife of a return to ‘normality’. A halt to eurozone quantitative easing next year now seems plausible.
The global cyclical upturn is the most synchronised in years. Even Brazil and Russia are finally turning the corner and there are big improvements in European industry. But, while much of the market optimism relates to the US, China’s demand is supporting more of the world’s exports. These countries are again the world’s growth engines while economies running current-account surpluses hitch a ride on their coat-tails.
So while near-term growth prospects continue to strengthen, the longer-term implications of this growth mix – ongoing imbalances, financial-stability risks and, if trade tensions intensify, renewed concerns about global growth – are likely to be less benign.
Consumer spending has been the world’s major driver, boosted – particularly in the West – by higher employment and lower oil prices
For now, though, better-than-expected global data means that we’ve edged up our forecasts. We expect worldwide GDP growth to pick up to 2.6% this year and 2.7% in 2018, with the developed world on 1.9% in both years but emerging economies growing 4.2% in 2017 and 4.6% next year.
Our US forecast is 2.3% followed by 2.7% but, despite big upgrades, our expectation for the eurozone is 1.5%, slowing to 1.4%.
Yet key factors supporting the industrial upturn could be temporary – such as stock-building and fiscal stimulus, especially in China. For the improvement in the world trade cycle to be sustained it is the broader demand drivers that will matter, and in particular whether we see a recovery in capital spending.
Consumer spending has been the world’s major driver, boosted – particularly in the West – by higher employment and lower oil prices. But the oil windfall is fading, and ageing populations spend more on services than on traded goods.
Government spending is now also supporting global growth, particularly China’s infrastructure investment, while tax cuts and some public spending should boost US demand in late 2017 and 2018. The hope is that U.S. deregulation and Chinese reforms will feed into stronger private-sector demand growth and higher productivity.
Commodity producers such as Australia and Brazil are clearly benefiting from China’s higher demand for imports, as are Asia’s electronics producers. Japanese and eurozone exports have picked up on the back of Chinese demand, too.
So despite this increasingly optimistic near-term growth outlook, the U.S. current-account deficit will likely widen while other countries’ already-large surpluses continue. As long as U.S. growth holds up and the Federal Reserve gradually tightens, excess savings from the world’s surplus economies should still flow into the US, potentially posing financial stability risks.
Trade protectionism is not the answer, though. It would raise U.S. consumer prices and create few jobs. And until domestic savings patterns change in Germany and Japan, those countries remain vulnerable to any growth disappointment and are a medium-term deflationary influence on the global economy.
A synchronised global recovery might be expected to simplify the Fed’s job of setting monetary policy. But global imbalances, financial stability risks, protectionist threats and big uncertainties over the timing and scale of the forthcoming fiscal package all pose challenges.
We expect two more U.S. rate rises in 2017 after March’s increase, but we doubt the Fed can keep tightening three times a year until it reaches its estimated long-term neutral rate of 3%. We expect only one rate rise in 2018.
Suggested Items
Europlacer Presents New Range of iineo SMT Placement Machines.
05/01/2024 | EuroplacerFor more than 15 years, the Europlacer iineo placement machines have made their mark on the SMT industry with unique features and unrivalled flexibility. Today, Europlacer announces the launch of the second generation iineo.
Incap US Hosts Annual Food Drive
04/30/2024 | IncapIncap US recently concluded its annual food drive, a tradition aimed at supporting the Greater Washington County Food Bank. This year marked the fourth year of the initiative, and we couldn’t be prouder of the collective effort that was made to its success.
Scanfil Uses Employee Engagement Survey to Improve
04/30/2024 | ScanfilOnce a year Scanfil arranges Employee Engagement Survey (EES) in order to get valuable insight from its employees. In EES all employees are invited to share their opinion, bring ideas for improvements, and contribute to making Scanfil a better place to work.
epoxySet Introduces EO-20E – Versatile, Electrically Conductive Epoxy
04/29/2024 | epoxySetepoxySet produces EPOXIOHM EO-20E an industry established, reliable electrically conductive epoxy designed for solder replacement, chip bonding and other intricate electronic and optoelectronic assemblies. This creamy paste has a an easy to use 1:1 mix ratio with a 48 hour work time.
The Right Approach: I Hear the Train A Comin'
04/25/2024 | Steve Williams -- Column: The Right ApproachTraining is often an afterthought in many organizations, and the longer a company has been in business, the more this seems to apply. Over the past couple of decades, it has been amazing to observe that the biggest offenders of this are the companies that overuse the sound bite, “Our most important assets are our people.” When you dig into the process and peel back the onion, their commitment to training is not commensurate with that statement.