Executive Summary
A. GLOBAL ENVIRONMENT
- Off to a good start in 1Q 2017. The global economy seems to show some growth traction going by the performance of global equity markets as investors’ sentiment and market optimism was buoyed by expectations that the Trump administration’s reflationary policies will lift the growth prospects of the global and US economy as well as better corporate earnings. Other bright spot is the firming of global crude oil prices to around US$56 per barrel before easing off in recent weeks, cementing positive effect from the OPEC’s oil output cut deal. Despite the upshot to optimism, material risks could emanate from faster Fed’s rate hikes, diminishing hopes of the US fiscal stimulus and the threat of trade protectionism amid a plethora of policy and political uncertainties.
- Higher global growth expected. Our tracking of high frequency global lead and forward indicators underpin a better year ahead, albeit still moderate. The International Monetary Fund’s (IMF) estimated global growth of 3.4% in 2017 (3.1% in 2016) and 3.6% for 2018 is still a distance from an average growth of 4.2% in 1998-2007. The US growth is picking up steam and the improved outlook in Japan is expected to offset the still moderate pace of growth in Europe. China’s growth and financial stability remained in focus as the government continues its economic rebalancing whilst ensuring financial stability and containing macro risks.
- Higher inflation risk, tighter monetary policy ahead? Has the tide turned? Better price prospects for oil and commodities, strong dollar’s appreciation against most major foreign currencies as well as firmer wage growth could lift inflation risk and may threaten the central banks’ price stability target in advanced economies and some emerging economies. Will the anticipated inflation risk prompt a radical gear shift in the advanced economies’ monetary policy, which will bring to an end of negative interest rates by Bank of Japan (BoJ) and the European Central Bank (ECB)? The upshot could come from the US Federal Reserve, which may be forced to embrace faster pace of rate hikes this year from the expectations of 2-3 hikes currently.
- A balancing act of headwinds and tailwinds. Trade protectionism mindset, the Fed’s interest rate upcycles, rising US dollar and hopes for the Trump administration’s reflationary policies – tax cuts and increased fiscal spending – are setting the global agenda. While the year 2017 started off on a pretty well footing, certain threats and risks still warrant close monitoring. Among these include potential ramifications in relation to the Trump administration’s trade and economic policies, the risk of stumbling blocks in the UK’s Brexit negotiations, which was triggered on 29 March 2017, the economic and financial disruptions in China triggered by the blow up of debt and banking crisis. In terms of political risks, the wave of political changes will continue unrelentingly in some European countries in 2017.
