Executive Summary
World Economic Situation and Prospects for 2018
- Global expansion remains on track, albeit moderately.The global economy ended the first quarter of 2018 on mixed growth performance in advanced and emerging economies. While we reckon that the global engine will continue to cruise along in the second halfyear, albeit moderately, there are real risks that could undermine the global expansion and investors’ confidence. Midway through the year, we saw the starting of the US-China trade war on 6 July, return of market volatility; emerging markets under pressure and the reality of central banks’ monetary tightening.
- Activity indicators point to stable growth. The start of the second quarter indicators saw continued stable growth momentum in OECD areas. The rate of expansion of the global manufacturing and services sectors continued to pick up. Global trade though will continue growing above trend this quarter but will be slower on trade protectionism risk. Higher crude oil prices are positive for net oil exporting economies. There is a divergent trend of inflation rate between advanced and emerging economies, with the Fed turning more hawkish on its future interest rate hikes path.
- Strengthening US economy; slow cruising speed in euro area and Japan.Recent data suggest that the US economic activity continued to rise at solid rate, supported by strengthening labour market, a pick-up in household spending and expanded fixed investment. However, both overall inflation and core inflation have moved closer to 2% comfort zone. In eurozone, disappointing and uneven data have heightened fears that the recovery is petering out or just a temporary blip. The Japanese economy is seemingly pulling out of a rough patch after shrinking in the first quarter. China’s growth continues to consolidate, albeit somewhat weaker under the weight of a multi-year crackdown on riskier lending amid escalating trade tensions with the US, which pushes the renminbi to its lowest level since December. Nevertheless, we dismiss fears an abrupt economic slowdown.
- The Fed signals two more rate increases.. Global liquidity and financial conditions, which are already somewhat tightened following the paced unwinding of the Fed’s quantitative easing (QE) program and continued interest rate hikes, will get tighter if the European Central Bank (ECB)’s QE program ends in September. The US economy is strong enough to absorb further rise in borrowing costs without choking off economic growth. The ECB has signalled that it plans to wind up its historic €2.4tn bond-buying programme at yearend while Japan’s monetary policy is diverging further from the U.S and Europe, with Bank of Japan (BOJ) pledging to continue with stimulus until Japan reaches its 2% inflation target.
- Uncertainties cloud economy.Risks to global economy and global financial markets stability have increased over past six months, which could put global markets and growth at risk. With trade tensions stalking the global economy, rising US bond yields on economic acceleration, rising inflation, a strong dollar and the Fed’s guidance of more interest rate hikes ahead caused capital flows reversal from emerging markets and exerted pressure foreign exchange. Stretched valuations of risky assets, with some late-stage credit cycle dynamics emerging pose the risk of sharp market correction.
