US chasing Australia on economic expansion, says Principal

Bob Baur

Principal’s Chief Global Economist, Dr Bob Baur, looks at how global markets fared in March.

World economic outlook: green shoots

“Stock markets plunged in December as evidence began to accumulate that a recession might be around the corner. Growth in China slowed significantly throughout 2018 and the fourth quarter rebounds in Europe and Japan were modest at best. The Fed added to the gloom by raising the fed funds rate and sticking to its prior  hawkishness and sentiment plummeted with stocks.

“Cooler heads prevailed in late December and stock markets rallied as investors anticipated the end of the slowdown. The late March stall may be investors waiting until some actual green shoots to validate the upsurge in stock prices. Those signs are starting to appear. After stabilising in the second quarter, world growth should pick up mildly as 2019 progresses.”

United States: chasing Australia

“Even with a weak 2.2% annualised growth in the fourth quarter, the U.S. economy expanded at a robust 3% pace from the fourth quarter of 2017. However, the government shutdown that lasted into January will keep any rebound modest. That drag, along with seasonal adjustment problems that the Bureau of Economic Research can’t seem to eliminate, may keep U.S. first quarter growth below 2%.

“If this U.S. expansion lasts through July, it will become the longest in U.S. history. While we doubt the next U.S. recession will be 27 years away like Australia’s current record run, whatever downturn comes will likely be mild and several quarters away. Investment growth should be healthy, albeit not as fast as the spectacular 7% pace of 2018, and we expect U.S. gross domestic product (GDP) to grow around 2.5%, driven by sturdy investment and strong consumer spending gains.”

China: a billion here, a billion there …

“Last year’s slowdown in China’s growth was somewhat self-imposed from an official attempt to slow the growth of debt. The idea likely was to prevent excess debt from creating a financial crisis in the future. That drag coincided with another obstacle to growth, reducing the pollution in China’s major cities. Add the trade dispute with the U.S. and the global growth downshift and China’s slump became worrisome. Starting last year, officials began to energise the economy with several rounds of stimulus.

“The improvement in the latest business surveys suggest that growth has stabilised already. Using official figures, growth will likely remain around 6% for 2019, although we would expect any uptick to fade into 2020 as the stimulus wanes.”

Europe: tighter labor markets, rising wages

“Slowing manufacturing activity, softening Chinese import demand, and political tensions have kept a lid on Euro area growth into 2019. Italy fell into a technical recession and China’s slowdown almost pushed Germany into one. The latest business surveys for March are still edging lower. But job growth has been stout, with the jobless rate the lowest in a decade. That puts upward pressure on wage growth, which in turn boosts household consumption.

“The European Central Bank (ECB) responded to the downshift in growth by extending its no-hike guidance through the full year and announcing new liquidity provisions, a strong banking system support. It also appears that fiscal policy will become more expansionary after Euro area elections. We expect growth to be positive but uninspiring in the 1% to 1.5% range this year and into next.”

Emerging markets: a favorable tailwind

“For several quarters, India has been the fastest growing major country in the world. Since taking office, the Modi government enacted several changes that were initially economic drags but with long-term positive effects. Those changes have shown up in India’s recent 7% pace of growth. Business surveys are edging higher and new manufacturing orders are strong. The SENSEX Index is pressing up against new highs and inflation seems under control, at least for the moment. The central bank will likely cut rates another 0.25%. GDP growth could remain in the 6.5% to 7% range.

“A China growth pick-up later this year would help lots of developing countries, especially in Asia. In addition, U.S. interest rates have fallen substantially. The U.S. dollar isn’t making new highs. These events, plus a gradual pickup in world growth, will provide a decent tailwind for emerging markets as 2019 progresses.”

Download: Economic Insights – March 2019