Onwards and upwards

News | 20 September 2017


With the US being the only major economy to suffer a slowdown
in the first quarter of 2017 and positive quarter-on-quarter growth data
coming from China, Europe and emerging markets, the increased activity
is spurring the global recovery, says the World Bank

Global GDP growth moderated somewhat in Q1 2017, to 2.6% (q/q saar (seasonally adjusted annual rate)) from an average of 3% in the last two quarters of 2016. The modest deceleration was partly driven by weaker growth in the US, which was restrained by a temporary dip in consumer spending. In contrast, growth strengthened in the eurozone, was resilient in China, remained positive
in Russia, and rebounded in Brazil.

Eastern Europe and Central Asia continued to benefit from the recovery in the eurozone, while an uptick in global trade helped sustain robust growth in East Asia and the Pacific. In sub-Saharan Africa, activity remained soft, contracting for the second consecutive quarter in South Africa. Recent high frequency data suggest strengthening global growth.

Industrial production showed positive momentum up to April, while the global composite purchasing managers' index (PMI) remained close to a two-year high in May and June. Global median inflation fell to around 2.1% in May and June, largely driven by recent declines in oil prices and continued low core inflation in major economies.

Forty-two new trade barriers

Global goods trade remained unusually strong in Q1 2017, growing by more than 7% (q/q saar) for the second consecutive quarter. Trade growth accelerated in May, and new export orders strengthened up to June, suggesting continued momentum in Q2 2017. Protectionist tendencies have been rising, albeit moderately, in 2017. G20 economies introduced 42 new trade-restrictive measures (new or increased tariffs, customs regulations, and rules of origin restrictions) between October 2016 and May 2017 - a slightly higher rate than during the same period one year earlier, but below the trend observed since the financial crisis.

Global financing conditions continue to be primarily driven by shifting expectations about monetary policy and inflation prospects in the US and eurozone. US long-term yields decreased through much of Q2 2017, mainly reflecting disappointing inflation outcomes and diminished market expectations of substantial fiscal stimulus. Despite an additional hike in US policy interest rates in June, long-term US yields remained near levels prevailing at the start of the tightening cycle. US long-term yields continue to be contained in part by spillovers from quantitative easing policies in other major advanced economies and strong global demand for safe liquid assets. In June, however, the ECB shifted its forward guidance, signalling that further monetary policy normalisation is likely as the recovery continues. This led to upward movement in both the eurozone and US long-term yields.



Commodity imports

In India, GDP growth slowed to 6.1% (yoy) in Q1 2017, as expected. Manufacturing PMI ticked up to 52.7 in June, the highest level since Q2 2016. In Mexico, industrial production fell 0.3% (yoy) in April, hindered by a mining sector contraction. In Turkey, GDP growth was sustained at 5% (yoy) in Q1 2017, while activity indicators suggest momentum in Q2 2017.

Poland's manufacturing PMI in April indicates a pickup in both investment and private consumption, following GDP growth of 4.4% (yoy) in Q1 2017. In Thailand, manufacturing PMI and exports improved, while business and consumer confidence dropped.

Inflation slows in US

Growth in the US is expected to post a modest rebound in Q2 2017, following a temporary consumption-led slowdown in Q1 2017. Labour market conditions improved further in Q2 2017, with job creation accelerating in June, the labour participation rate increasing, and the unemployment rate, at 4.4%, remaining close to its post-crisis low. Broad indicators of labour market slack, such as the U-6 measure of unemployment, showed significant improvement since the start of the year. In the past, the return of marginally attached and discouraged workers in the labour market coincided with rising wage pressures.

However, hourly earnings decelerated during Q2 2017, to an annual rate of 2.5% in June. Coupled with moderating core inflation up to June, the absence of rising wage pressure contributed to a decline in market-based inflation expectations. However, the US Federal Reserve hiked policy interest rates in June, stressing the temporary nature of the inflation slowdown as well as prospects of growth outpacing its potential rate over the next two years. The central bank also announced that it plans to gradually reduce the size of its balance sheet.



Eurozone to normalise policies?

Growth reached a two-year high of 2.3% (q/q saar) in Q1 2017, with high-frequency indicators suggesting continued strength in Q2 2017. In June, the composite PMI remained close to record highs, although it declined marginally from May, while economic sentiment further improved. Credit growth has been on an upward trend since mid-2015, reflecting increased traction of exceptionally accommodative monetary policy. It remained close to post-crisis highs in April and May, albeit moderating somewhat.

Headline inflation dropped to 1.3% in June, reflecting receding energy prices, while core inflation recovered slightly to 1.1%. The ECB left its policy stance unchanged in June, but highlighted a shifting balance of risks. In July, it signalled that the recovery might warrant further policy normalisation. Policy uncertainty diminished in June following the election results in the Netherlands and France.

China continues robust growth

GDP expanded by 6.9% (yoy) Q2 2017 - the same rate as in the previous quarter. In June, industrial production and retail sales growth accelerated, while fixed asset investment growth was stable. Credit growth remained strong, at above 12% (yoy) throughout Q2 2017, reflecting rapidly expanding loans to households, but non-traditional banking activities continued to moderate. Although regional divergences in the housing market persist, the gap between prices in large cities and that in medium-size cities has narrowed.

Policy and regulatory tightening have been calibrated to support market stability. In July, the National Financial Work Conference emphasised the importance of deepening financial regulatory reforms and containing financial risks. Foreign exchange reserves rose for the fifth consecutive month in June. Since the beginning of the year, capital outflows have slowed as China tightened rules on moving capital outside the country. MSCI (Morgan Stanley Capital International's emerging markets index) introduced China's A-stocks in its global benchmark equity index in June.

This is an extract from the World Bank's July Global Monthly report. It has been reproduced here with permission


Figure 1: Global trade growth (%) | Source: World Bank data

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