Fidelitys makrouppdatering maj 2015

Global growth

As the drivers of weakness in the first quarter of this year gradually fade, the global growth picture is likely to improve and become more synchronised in the second half of 2015. But even though the pace of growth is expected to pick up through the year, the rebound is likely to be relatively subdued with a generally low-inflation, low-growth environment persisting. The main tailwinds that should help this moderate acceleration – lower energy prices and more supportive central bank policy – are broadly in place, benefitting consumption and activity globally. With the strong disinflationary trend likely to stay at least until mid-2015, central banks will keep liquidity support for now.

However, the recent rise in oil prices and yields has the potential to diminish the two tailwinds. Further tightening in financial conditions (particularly if not supported by fundamentals) and further rises in oil prices could make the growth picture more complicated. But at this point, the recent moves are unlikely to pose significant risks to the outlook. Beyond 2015, the growth backdrop could turn less benign, but this will be something to look out for later in the year.

Risks to the outlook: The taper tantrum of 2013 and the ‘bund rout’ of late have given us a flavour of the type of market reaction we can expect if US interest rate rises occur more quickly than expected. Given the size of positions and liquidity issues in certain markets, the potential for outsized market moves would pose serious risks to global growth.

Greek debt negotiations are unlikely to undermine the eurozone recovery at this point. But some deterioration in business confidence in April might have resulted from the related uncertainty – it will be important to watch if this trend becomes more entrenched over the next few months. While a deal is likely to be reached at some point, this remains a serious tail risk as any sign of a fully fledged ‘Grexident’ or ‘Grexit’ would be very disruptive. The Russia-Ukraine conflict poses serious risks to the global economy, but the timing is highly uncertain. Further escalation in the conflict (entailing further sanctions) and/or another sharp decline in the oil price would most certainly push Russia back into crisis mode. This would pose risks to Europe and beyond because of potential spill-overs through the financial transmission channel.

After a much weaker-than-expected Q1 (due to weather-related disruptions, energy sector adjustment to the lower oil price and a strong US dollar), the main focus now is on how fast the weakness will fade. So far, April delivered mixed news, suggesting a rebound is unlikely to be sharp. All hopes are now pinned on consumers who have until now saved the income windfall which resulted from recent sharp declines in energy prices. Given the high consumer confidence and the relative strength of the labour market, consumption is likely to accelerate through the year.

But there is some uncertainty as to the magnitude of the potential acceleration. Until we see definitive signs of recovery in household spending, the Fed will tread carefully. At the same time, inflation and wage growth are likely to increase only gradually. Importantly, given the widening monetary policy differential between the US and other major economies, a stronger US dollar will remain a drag on exports and inflation.

This means the Fed will be able to keep rates lower for longer, with June definitely off the table in my view, and with a September hike remaining a possibility. But given my expectations for how the data will evolve, a December hike remains more likely, with risks skewed towards 2016.

Eurozone

Despite somewhat slower momentum in April, the recovery remains intact, with the periphery clearly gaining pace. The main tailwinds (lower energy prices, a weaker euro and easier central bank policy) remain,broadly,in place, and should continue driving the cyclical upturn. The 2015 consensus growth forecast has been revised up once again over the past month, but upside risks remain. The tightening in financial conditions that resulted from the recent market turbulence (via high yields, a stronger euro since mid-April and lower equity prices) is unlikely to pose significant risks to the recovery at this point. However, additional market moves in that direction would tighten financial conditions further, partly offsetting the tailwinds that have been driving the recovery so far. Higher oil prices would also diminish the related tailwind. In addition, the two familiar risks (Greece and Russia-Ukraine) remain unresolved, and any related escalation or uncontrolled unwinding would be disruptive.

UK

Fundamentals remain relatively solid for now, boding well for growth in the second half of 2015. But risks associated with a Conservative majority government will come to dominate investors’ minds in due course. Foremost, the prospect of an EU referendum could pose risks to economic growth and stability, as the UK’s large current account deficit would make the economy and currency vulnerable to any sudden reversal in capital flows. Second, the focus will now shift to the fiscal austerity that was effectively put on hold some time ago: it will now have to be pushed through more forcefully.

The composition of the fiscal squeeze, however, remains uncertain as the government might not be able to implement all the cuts planned, meaning possible tax rises in the near future. With a fiscal drag set to weigh on growth over the next few years, it is hard to see how the economy can accelerate well above the growth rates of the past couple of years. The strong GBP will also continue to be a headwind for now.

Japan

Disappointment continues, as the domestic economy remains weak with negative real wage growth weighing on incomes and consumption. Over the past month, the Bank of Japan revised down its CPI outlook for FY 2015 to 0.8% and pushed back the timeline for achieving the 2% inflation target to the first half of FY 2016. The BoJ is likely to hold back additional easing for now, at least until spring wage negotiations are out of the way and wages are hiked this summer.

If that proves insufficient to boost consumption and growth in the months ahead, they will need to do more later in the year (or, alternatively, they might choose to revise down the price outlook and the inflation target timeline once again). Either way, it is hard to see how we can get a self-sustained recovery from here without more policy action (the ‘three arrows’) and/or a much stronger rebound in global demand relative to current expectations.

China

Despite the latest policy action (the People’s Bank of China delivered three cuts in six months) overall financial conditions remain tight. Raising the deposit premium means banks are still constrained in their ability to lower lending rates, limiting the effectiveness of the rate cuts. The continued strength of the renminbi and weakness in monetary indicators (including money supply and credit) contributed to further tightening in financial conditions recently (Chart 7). A pick-up in global demand in combination with further policy support should contribute towards growth stabilisation in the coming months. Further monetary easing measures and fiscal stimulus (including pressure on local governments to increase fiscal spending and make progress on infrastructure projects) should be helpful in this respect but are unlikely to be sufficient to push growth close to the target of 7% for the year.

Emerging Markets

As the year progresses, stabilisation in China driven by further policy support could spill over into other Asian EM, especially as it is likely to coincide with broader growth synchronisation in developed markets. If the rebound in commodity prices continues, the prospect for commodity producers (particularly Latin American countries) could improve, although the lack of structural reform and vulnerability to the Fed’s rate normalisation mean these countries are still unlikely to stage a strong rebound in any scenario. Indeed, with the Fed hike looming on the horizon, EM vulnerabilities related to external imbalances are likely to surface. The usual suspects are particularly exposed: Turkey, South Africa and Brazil among others.

RISKS FOR 2015

• US ‘soft patch’ turns into a more protracted slowdown, weighing on growth elsewhere and resulting in the Fed stepping away from its policy normalisation trajectory.
• The Fed hikes earlier and faster than expected (perhaps even in June), undermining the global recovery in the second half of this year, via tighter financial conditions globally.
• Russia-related risks including: (1) a deep recession/crisis spills over to Europe via trade and financial channels; (2) conflict escalation results in tougher sanctions and further economic troubles; (3) geopolitical tensions spread to the Baltics.
• EU/Greece negotiations break down, leading to a ‘Grexident’ or ‘Grexit’.
• ECB decides to taper earlier as a result of much stronger growth and inflation, or a big inflationary shock (for example, following a spike in oil prices) choking off recovery.
• Faster-than-expected growth slowdown and/or financial stress in China;
• Policy stimulus in Europe and/or Japan proves insufficient to escape the low growth/low inflation equilibrium.
• EM currency weakness versus US dollar puts pressure on EM corporates whose liabilities are USD-denominated.
• A sovereign or corporate credit event (eg, Venezuela, Russia, banks).

Anna Stupnytska is the Global Economist at Fidelity Worldwide Investment. Before joining Fidelity
in July 2014, Anna was a macroeconomist at Goldman Sachs Asset Management. She holds a degree in Economics from the University of Cambridge, and a Masters of Philosophy in Economics from the University of Oxford.

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