When things are so good, they can’t get any better, they usually don’t: Principal on world economy  


Jerome Powell

What happens after growth peaks?

“A synchronized pick-up in global growth has been happening for some time. It started in early 2016 after the commodity rout ended, then gathered steam in 2017. Japan, the eurozone, and the United States grew above trend; Chinese growth decelerated but the slowdown was smooth. Commodity prices and global trade perked up nicely. Confidence and other survey measures soared, creating record high after record high in some cases. Economic data kept surprising on the upside, especially in Europe. Investors and businesses finally realized that the post-financial crisis growth slump was over.

“But when things are so good that they can’t get any better, then they usually don’t. So, what happens after peak growth? A bit of deceleration, because the pace of world growth may have peaked. Strong surveys have likely climaxed in Europe. Growth in Japan is pushing toward trend. China’s long slowdown has begun. Still, 2018 should be a good year for the global economy with that bit of deceleration and a peak in commodity prices. The strong momentum should carry over well into 2019.”

An investment type heads the Fed

“Fed watchers may have to learn a new language with Jay Powell at the Federal Reserve (Fed). His straight, clear and unhedged talk in his first Congressional Committee appearance seemed to unsettle investors who had become used to economics PhDs who note “on one hand” before describing “on the other hand.”

“However, Powell’s clear language suggested that he was setting the stage for the Fed to hike four times in 2018. Markets sank on that reading. More likely is that Powell’s business background was simply leading him to state the obvious: that U.S. growth prospects had indeed improved. Nothing else in his words inferred that the Fed would depart from its path of gradual rate hikes.”

Asset allocation outlook: world economic momentum still strong

“The huge downdraft in early February – a peak-to-trough plunge of 12.2% on the S&P 500 Index in 10 trading days – was dreadfully, wickedly fast and far. This was triggered by faster-than-expected wage growth in January (accentuated by volatility sellers trying to limit their losses), but the fundamentals of rising interest rates implied that the correction was waiting to happen.

“It may be time for stock markets to fully adjust to higher long-term yields, so this correction might not be over for a month or two. The downdraft is being exacerbated by the March 1 announcement of tariffs by the Trump administration.

“However, world economic momentum is still quite strong, even if it climaxed in the eurozone this quarter, and earlier in China and Japan. The extra capital spending induced by the tax package will likely keep U.S. growth at the top of its range for several quarters yet. The Fed will still be accommodative even if the committee raises rates two or three times in 2018. Profit growth will be excellent and long-term interest rates should stabilise before too long. All this could generate a nice, late-inning rally in the long investment cycle that began in the United States in March 2009.”

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