Andrew Milligan says that while there are positive signs for global growth there is still much uncertainty
My last article welcomed the appearance of spring weather, but warned of the risk of icy blasts ahead. My experience as a meteorologist matches my ability to make short-term economic forecasts! A few days ago I was scurrying to the conference centre in Edinburgh pursued by a hail storm.
In recent weeks, the appearance of cold blasts of political reality has rather worried investors about the economic progress that might be made in 2017-18.
Each month I look through the consensus economic forecasts made by global blue chip organisations, to help assess what is priced into markets and the differences, if any, with our own views.
In late 2016 it was interesting to see steady upgrades to growth forecasts for 2017, but this has come to an end.
In late 2016 it was interesting to see steady upgrades to growth forecasts for 2017, but this has come to an end. There are exceptions such as upgrades to the UK on the back of slightly more robust consumer spending. Elsewhere, GDP forecasts for 2017 for the USA are stuck around 2.25% a year, Japan about 1.25% a year, Germany 1.4% a year, China 6.5% a year, and so forth. Estimates for 2018 are a little higher, but the uncertainty around those views is obvious.
One reason for this pause probably relates to a problem with seasonal adjustment commonly seen in the first quarter of each year. Truth be told, the reasons are not quite clear but probably relate to the growing importance yet fluid timing of Chinese New Year, when large parts of the Asian region shut down. US economic growth in Q1 could be as low as 1%.
More important is the clear relationship between political uncertainty and business investment. The spate of European elections is one example, most obviously the French Presidential and parliamentary elections between April and June but also the situation in Germany and Italy.
Over the Atlantic, investors are suddenly aware of the deep fractures within the Republican party. Although reform of Obamacare has been a central plank of the Republican manifesto for years, proposed legislation collapsed within a week. This suggests that the Republicans will find it very difficult to push through either comprehensive or large tax reforms, when so many factions within the party have different views about the government's aims or objectives.
In addition, the failure of the healthcare bill and its financing structure, against the backdrop of less support for a border adjustment tax, complicate finding additional finance for future tax cuts. The implications for the degree of Fed tightening into 2018 are very clear.
Of course the US economy is well placed in spring 2017. Consumer confidence at a 16-year high reflects a strong labour market as small businesses start to invest. In addition, exports are benefitting from rather stronger trade especially in Asia. Looking elsewhere, the Chinese government still desires economic stability in the run up to this autumn's all important congress, while Europe has a self-fulfilling cycle driven by better labour markets and a slow improvement in bank lending.
The backdrop for corporate profits growth is favourable, say 5-10% this year. Upside risks reflect the ability of the US government to push ahead with some helpful tax changes rather than getting caught in a Washington gridlock.
Downside risks reflect two issues: politics, of course, say in the case of France or Italy, but another issue to monitor is the oil price. OPEC looked to be able to control the market in a $50-60 per barrel range but there are some signs that excess supply could force prices somewhat lower, which would have knock on effects on headline inflation and hence the need for central banks to tighten monetary policy too quickly.
Andrew Milligan is head of global strategy at Standard Life Investments
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