Global Economic Outlook - April 2016
by Carl Tannenbaum of Northern Trust,
If you had somehow fallen asleep last New Year’s Eve and awoken on March 31, you might not have realized that you’d slept through the first quarter. Economic prospects and market levels were little changed from point to point.
But that sense of stasis would be at odds with the tumult that characterized the first quarter of 2016. First came despair: the perception that policy makers had lost their edge sent forecasts and markets into a steep correction through the middle of February. Then came relief: a renewed sense of confidence returned to the outlook and allowed asset prices to recover.
While many are quite happy to signal an all-clear, a number of important uncertainties still bear close watching. Our central expectation continues to call for moderate global growth, but risks to the outlook will have to be carefully managed.
UNITED STATES

The Fed sees global economic and financial developments as a source of near-term risk, but these signals have improved since the Fed’s last meeting. Continued forward momentum in the economy supports expectations of a higher policy rate at the June meeting. Recent Fed rhetoric echoes a similar view.
EUROZONE
The recovery in eurozone growth continues to be steady, if unspectacular, with wide disparities in expansion levels between member states. Fiscal policy could potentially prove more expansionary this year, with more of a focus on structural deficits rather than headline levels. Domestic demand should support overall growth of 1.5%.
More eurozone employers expect an increase in employment than a decrease over the next 12 months, an encouraging sign. If the unemployment rate can continue its downward trajectory, it should average 10.3% this year. Again, rates will continue to vary among member states, with the French jobless rate likely remaining above that of the eurozone as a whole.
The inflation story remains fairly muted. The European Central Bank (ECB) expects price growth of just 0.1% this year and forward expectations in the marketplace are still well below the 2% target. However, a gradual upward trajectory in oil prices could raise the level a little higher. We predict a final yearly figure of 0.4%.
Credit condition surveys suggest that the ECB’s current loose monetary policy stance is having a positive effect on the economy, albeit a small one. With this in mind, the ECB will likely stand pat this year to allow the full effect of its programs to take hold.
UNITED KINGDOM

Real gross domestic product (GDP) growth continues to be dominated by the service sector and domestic demand remains healthy. Consumer spending has been strong, thanks to growing levels of real disposable income, supported by the low oil prices. This is expected to continue, although at a slightly moderated pace, leading to a forecasted expansion of 2.1% this year, among the strongest in the G7.
Unemployment is close to the best estimate of the natural rate, so the pace of improvement is expected to slow (indeed, latest figures show a small uptick in the number of unemployed); thus we expect a level of 5.1% for 2016. Recent increases in inflation were mostly seasonal, but for the first time surveys are pointing to consumers expecting prices to rise more quickly than recently observed. The Bank of England is not expected to move until 2017 at the earliest, given risks surrounding Brexit and ongoing global caution.
A clear downside risk to the forecast is the EU referendum. The first signs of uncertainty are starting to feed into the marketplace – some businesses have reported delaying investment and hiring decisions. However, given a vote to stay, we would expect a catch up effect in the third and fourth quarters.
JAPAN

Meanwhile, household inflation expectations have been sliding in recent weeks and the BoJ has once again delayed its target date for getting the annual rate of inflation back up to 2.0%. Finally, the recent round of earthquakes and aftershocks on the southernmost island of Kyushu have disrupted manufacturing supply chains and will likely curb second quarter economic growth. All told, real GDP will struggle to expand at all this year and inflation will at best remain flat.
The BoJ has all but admitted that it is running out of options, with Kuroda reiterating that monetary policy alone cannot do all the heavy lifting. The BoJ’s shift to a negative deposit rate in January has not been popular with the voters, and the positive effects of quantitative easing appear to be tapering off. Fiscal stimulus will likely come back to the fore in the coming weeks, particularly in the wake of the destruction on Kyushu. We also suspect that Abe will decide not to raise the nationwide sales tax from 8% to 10% in April 2017 as planned.
CHINA
A combination of regulatory measures to curb capital outflows and fiscal stimulus to spur domestic investment has helped ease the fears of many investors that the yuan would suffer a marked devaluation this year, or the economy a hard landing. Real GDP growth in the first quarter did ease back from the 6.9% recorded for 2015, but the year-over-year rate of 6.7% suggested there will be no nasty surprises as the government tries to rebalance the economy. Global commodity markets have duly stabilized in recent weeks, and export levels across the wider APAC region seem to have stopped falling.

The authorities have vowed to curb excess capacity in certain sectors and to steer the economy away from a reliance on debt-fueled production for exports and toward domestic consumption. However, they also seem unwilling to countenance the short-term economic pain that such a rebalancing implies. We can therefore expect to see continued fiscal stimulus measures through the year, as the economy heads toward the official growth target of 6.5%. This will be the slowest annual pace since 1990, but arguably still too fast for an economy that is trying to rebalance.


