Early in 2018, the global economy exhibits robust health after nine years of recovery since the Global Financial Crisis. Output in the US has finally surpassed pre-crisis levels, while Asia’s emerging economies continue are continuing to expand at a healthy rate. But despite the rosy backdrop, there are growing concerns that this period of growth could be in its later stages.
“A lot of people say we are due for a recession, because recoveries do not normally last this long,” said Frederic Neumann, Managing Director and Co-Head of Asian Economics Research at HSBC. “But actually, most of the cyclical indicators are robust.”
Speaking at HSBC’s 2018 Asian Outlook and BRI Forum, Mr. Neumann said that he expects another year of strong growth from China, a recovery in international trade, and limited inflationary pressures which reduce the likelihood that central banks will hike interest rates. All of these factors, he said, will help make 2018 another good year for the global economy.
The improved situation in the US however needs to be put in perspective. In the aftermath of the Global Financial Crisis, the world’s largest economy suffered one of the most severe recessions since the great depression – at its lowest point, the US lost on some measures around 13 years of output gains.
Even after nine years of steady recovery, therefore, there is still plenty of slack in the economy that will likely keep a lid on wage and price pressures for some time. The recent history of the Eurozone paints a similar story, being arguably still further behind the US in soaking up labor market slack even if the latest cyclical data has been strong.
“It is only now that we're starting to see genuine economic expansion in the US, which highlights that price pressure in the western world will remain very low indeed,” said Mr. Neumann. “The Federal Reserve will have to take it slow, and the European Central Bank (ECB) will only withdraw its monetary inflows very gradually, because these countries are not ready to generate inflation.”
This is good news for Asia, he said, because it means that interest rates are likely to remain stable. At the same time, the value of the US dollar will remain stable, helping to limit potential pressures on global financial markets. “This helps encourage the gradual expansion that we have seen.”
Moving on to Asian economies, the narrative over the last decade is one of strong growth, as output in the region’s emerging economies is on some measures around 90 per cent higher than it was in 2008. Now that the Asian growth engine is joined by a simultaneous uptick in the US and Europe, Mr. Neumann said there is an unusually stable backdrop for the global economy.
One risk for Asia is that stronger demand in the US could make the Federal Reserve nervous about price pressure, which could lead to accelerated interest rate hikes. Many of Asia’s corporates and sovereigns could be negatively impacted by such a development, even is the region has over the decades reduced its reliance on US dollar debt.
Although HSBC expects the Federal Reserve to further increase rates this year, Mr. Neumann does not expect it to have a significant impact on Asia. This because that an increase in short-term rates does not necessarily result in an increase in the long-term borrowing rates – as the relatively flat yield on 10-year US Treasury Bond demonstrates.
Asia’s largest economy is powering ahead, with Chinese GDP growing by 6.8 per cent in 2017, which was a stronger performance than on the prior year – defying many forecasters who were expecting a weaker result. A sharp increase in infrastructure spending was a major contributor, though there are longstanding fears that China’s investment in infrastructure is reaching a point where it no longer delivers an economic return.
Mr. Neumann said that such fears are unfounded. “China is a vast economy that still has enormous potential for infrastructure. In the inland areas especially, there are massive needs for infrastructure, and we are confident that this will carry the economy for quite some time.”
Away from infrastructure, new growth drivers are coming to the fore – such as strong consumer spending and an industrial agenda that plans to put China at the forefront of a number of high-tech sectors. In addition, Mr. Neumann pointed out that private manufacturing investment is finally starting to pick up, which should provide additional to growth in the future.
As in China, infrastructure will play a crucial role in supporting ASEAN growth going forward. This will be stimulated by the connectivity goals of the Belt and Road Initiative, which will complement local investment channels.
To sum up: “If you look at 2018, it all looks quite rosy. The indicators are all positive, even though we are in the ninth year of a very robust Asian recovery,” said Mr. Neumann.