Bob Baur

Principal Global Investors’ Chief Global Economist, Bob Baur, Ph.D., details the growth expansion of four main economic areas, and how the rest of the world is being pulled along.

Is this a Goldilocks situation?

“Probably not, but it surely feels that way. Growth is robust, financial conditions are easing, inflation is low, job gains are excellent, stock markets keep hitting new highs, profits have come roaring back, and analysts are raising earnings estimates. Central banks are not spoiling the party and long-term interest rates stay tame. All boats seem to be lifted. What’s not to like?”

A synchronised upturn

“The consensus finally had to admit that eurozone growth is robust: three successive quarters of over 2% real growth SAAR^[1]. That’s even faster than the United States and follows 14 straight quarters of positive growth. Business surveys stay strong, consumer spending and investment are driving growth, and consumer confidence is the highest in a decade.”

“The official measure of second-quarter GDP growth in China was a fast 6.9%, driven by better retail sales, investment exports, and real estate activity. Second-quarter industrial production in Japan jumped 7.7% SAAR over the first quarter and core capital goods shipments surged at a 21% annual rate, according to J.P. Morgan. Clearly, Japan’s economy is expanding at a healthy pace.”

“With those four major economic areas expanding nicely, the rest of the world is being pulled along. Growth in Canada and Australia has cooled since the boom in commodity prices, but both are pushing forward with job and income growth. The rebound in commodity prices and demand from China and the developed world has helped other emerging countries. Global growth is synchronised, broad-based, and healthy.”

Diminished risk

“With Prime Minister Macron’s accession in France and Chancellor Merkel’s likely re-election in Germany, political risk has nearly vanished in Europe. New White House Chief of Staff Kelly is creating order out of chaos. Trade problems could occur, but recent U.N. sanctions on North Korea with China and Russia concurring may diminish those risks. Excess debt will be a big issue for China at some point, but likely not until years into President Xi’s next five-year term. Overall, we expect the current upturn to last several quarters.”

Interest rate outlook

“Markets today are pretty sanguine about the odds that yields could rise. But robust global growth, the Fed’s portfolio reduction plan, an anticipated slower pace of bond purchases by the ECB, faster nominal growth and a strong profit picture should combine to push yields higher by year-end. And, even though it appears unlikely at this juncture, restored faith in the Trump administration to move its policy agenda through Congress could further raise yield prospects.”

Currency and stocks

“Currency movements may explain much of what happened to markets in July. The U.S. dollar kept up its year- to-date losing streak against most world currencies. Both the euro and yen gained substantially on the dollar, while the Stoxx Europe 600 price index and the Nikkei 225 index were both flat for the month. The real winners in July were emerging markets: the MSCI Emerging Market index gained a terrific 5.5%, and the MSCI Asia ex-Japan index rose 4.9% in price. Dollar weakness and the rebound in commodity prices were a potent propellant for developing economies.”

Market outlook

“Investors seem firmly glued to the ‘lower rates for longer because there is no inflation’ theme. So, until there is evidence of a bit more inflation, and central banks get a good start on their transition away from super- accommodative policy, stock prices will likely stage a little more rally. We expect the recent weak inflation numbers to turn around in a month or two, wage gains to pick up as the year progresses, and both the Federal Reserve and the ECB to show greater efforts or plans to normalise interest rates by September or October. This combination could easily put in a top in stock prices. Investors should expect to reposition portfolios for lower risk later this year.”

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[1] Seasonally Adjusted Annual Rate

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