The year 2018 started with worries that the high base of 2017 and protectionist rhetoric between the US and China would have
a reverberating effect on global growth. Over H1 2018, the duo of stronger growth across emerging markets– relaying the still elevated commodity prices, especially for oil-exporting countries – and growth resilience in advanced economies have re-shaped the landscape with consensus global growth now far exceeding the view at the start of the year.
Lower outlay falters growth in advanced economies
In the US, real GDP growth slowed in the first quarter of 2018 to an annualized pace of 2.0%, the slowest in the last four quarters. One key reason for the slower growth rate was personal consumption expenditure which grew by 1.1% YoY (relative to 4.0% in Q4 17), the slowest pace in the last 18 quarters.
Also, government spending grew at just 1.2% annualized clip (relative to 3% in Q4 17) on the back of a slowdown in national defense spending (1.8% vs. 5.5% in Q4 17). Consequently, despite the strong growth in private domestic investment of 7.3% YoY (+260bps from prior quarter), the impact of lower government and consumer spending drove the slow economic growth relative to prior quarter.
That said, leading indicators guides to a pick-up in Q2 2018 as preliminary estimates of the labor market, retail sales and industrial production have continued to reflect the pass-through of tax reform on after-tax household incomes. For context, over Q2 2018, the unemployment rate firmed to 3.8% YoY from 4.1% at the end of Q1 2018. More so, we think the Q4 17 growth of 4% YoY was more of an outlier as the strong numbers in consumer spending reflected strong auto sales following the hurricane which drove replacement spending in the period.
Elsewhere, growth decelerated in the Euro area in the first quarter of 2018 to an annualized rate of 2.5% (vs. 2.8% in prior quarter). The slowdown is attributable to the contraction in government expenditure (-10bps from prior quarter to 1.2% YoY) and external trade (-210bps from prior quarter to 4.5% YoY) – a fallout of temporary factors including extensive union activities in France, unseasonably cold weather in Germany, and short-term bottlenecks in other nations.
Unbundling the region revealed that growth slowed in five countries which combined accounts for ~96% of the region’s GDP. Specifically, France (-70bps to 2.2%), Germany (-60bps to 2.3%), Spain (-10bps to 3.0%), Italy (-20bps to 1.4%) and UK: -20bps to 1.2%) all contributed to the slow growth in the region. However, recent events over Q2 2018 appears to have overshadowed the slowdown in Q1 2018. For context, EU’s unemployment data in the month of May showed improvement to 8.4%, the lowest rate recorded since December 2008 (vs. 8.5% in the prior month and 9.2% in May 2017). To add, within the Euro area, the lowest unemployment rate was observed in the Czech Republic (2.3%), and Germany (3.4%).
Furthermore, the external sector strengthened over the first four months of 2018, with the Euro area recording trade surplus of €64.4 billion (vs. €58.7 billion same period in 2017), as export of €738.2 billion ($711.5 billion in January-April 2017) more than outweighed imports of €673.8 billion ($652.8 billion in January-April 2017).
Still in Europe, UK economy stuttered in Q1 18, rising by 1.2% YoY vs 1.4% recorded in the last quarter of 2017. Going by trend, this is the slowest pace of growth since Q3 12 owing to muted growth in services category1 (1.2% YoY vs 1.1% in Q4 17) which offset sturdy growth seen in industrial production. On services, the slowdown mirrors activities in financial services (1.7% YoY) which has been decelerating since the start of 2017, while the TS&C3 and DHR4 sectors grew by 2.8% and 0.7% YoY respectively. In addition, construction and agricultural sector which jointly accounts for 7% of GDP contracted by 3.3% and 1.3% YoY respectively due to slowdown in consumer spending.
On the flipside, industrial production grew by 2.2% YoY (vs. 1.9% YoY in Q4 17) buoyed by improved activities in the manufacturing sector (+2.5% YoY) while the electricity and mining sectors grew by 2.3% and 3.5% YoY respectively. It is believed the tepid growth mirrors the uncertainty over business prospects in the economy ahead of Brexit which has slowed investment spending, while subdued consumer spending reflects the squeeze on consumer real income borne out of rising inflation which touched a four year high in Q4 17 at 2.8%. For context, retail sales which serves as an indicator of consumer spending has been on a downtrend since Q2 17.
The Japanese economy also grew at a slower pace in Q1 18, printing at 1.1% YoY – hinged on the slowdown in household consumption which grew by 1.1% YoY (Q4 17: 1.9%). Furthermore, the economy recorded a slower growth in export (4.8% YoY vs. 6.5% in Q4 17), government spending (0.6% YoY vs. 0.8% in Q4 17) and a further contraction of 5.4% YoY in private investment (Q4 17: -2.4%). Beyond first quarter, PMI for the month of April, May and June printed at 53.8, 52.5 and 52.8 index points respectively which speaks to an expansion in the economy. However, export orders contracted in the month of June to 49.5 index points (vs. 51.1 index points in May), a reflection that the on-going trade dispute between China and US is having a toll on the export-focused economy.
For context, the Chinese economy sources most of its automobile parts and electronics from Japan, with China accounting for 19.2% of total exports in 2017.
Supportive global monetary policy to consolidate growth over 2018
For the rest of the year, we are more optimistic on growth across advanced and emerging economies, reflecting improvement in consumer and business sentiment, supportive global monetary policy stance and fiscal stimulus. Consequently, global economy is now forecast to increase by 3.9% YoY, according to IMF. That said, the major risk to global growth over 2018 and 2019 remains the ongoing trade protectionism. However, we believe the impact would be a switch in trade from one region to another, without any major impact on overall global growth. Specifically, in advanced economies, growth is projected to peak at 2.5% YoY in 2018 before decelerating in 2019 to 2.2% YoY, while growth in EMs is projected 10bps higher than 2017 reading at 4.9% YoY with a further uptick over 2019 (5.1% YoY), a reflection of the still elevated commodity prices, improved confidence in the region and a stronger projected growth in the Middle East and Latin America over 2019.
Brighter Days Ahead For Emerging Markets; But Risks Abound
Emerging Markets outlook appears favorable over the rest of the year with IMF forecasting a 10bps YoY expansion in economic growth to 4.9% in 2018. This expectation is largely hinged on upbeat macroeconomic outlook in Emerging Asia and Europe which would more than offset possible shocks from Latin America and other Emerging economies. However, while tighter financial conditions in the US is expected to have spillover effects on Emerging Market economies, the still elevated commodity prices would more than neuter its effect on growth.
In China, the pace of output expansion is expected to decelerate to 6.6% (6.9% in 2017) as the government places tougher limits on industrial pollution, as well as regulatory crackdown on riskier lending practices which has pushed up borrowing costs and crackdown on local government spending. In addition, a potential trade war between US and China could pose a great risk to China’s growth. In India, the economy is expected to grow 7.4% in 2018 fiscal year20 (2017: 7.1%) on the back of strong private consumption as well as fading transitory effects of its demonetization as well as implementation of the national goods and services tax.
Elsewhere, US decision to shield Brazil from its steel and aluminum tariffs provides boost to the economy. However, we see risk springing from rising political uncertainty, as President Michel Temar scrapped his intention to seek for re-election. Over in Mexico, US tariff slam of 25% and 10% on Steel and aluminum respectively poses threat to the country’s trade position over the near term.
More so, the imposition of US tariff on Mexico and Canada is a pointer to likely fallout of the NAFTA negotiations between member nations. If this plays out, this could lead to confidence shock on Mexico’s economy and drive short term market volatility as Mexico is heavily dependent on the US with over 75% of its exports sold to American consumers. In Turkey, growth is expected to moderate to 4.4% in 2018 as government fiscal stimulus begins to fade off following President Erdogan win in the June snap election which was supposed to hold in November 2019.