Guest economic insight for August
This guest economic insight for August is kindly provided by Lucy O’Carroll of Aberdeen Asset Management for private clients of Investment Quorum.
Monthly highlights: China casts a cloud over the global outlook
Global activity looks set to slow this year, before picking up moderate speed again in 2016-17. We expect global GDP* growth to slow slightly to 3.1% in 2015, before rising to 3.7% in 2016 and 3.8% in 2017.
We have downgraded our 2015 growth forecast on the back of a more downbeat outlook for China, which is casting a shadow over the prospective pace of activity. China’s official GDP numbers show the annual rate of growth unchanged in Q2, at 7.0%. Considerable uncertainty surrounds the true pace, however, with other indicators painting a much weaker picture. The recent currency devaluation suggests that the Chinese authorities are increasingly concerned by the scale of the economic slowdown. We expect further policy easing over the coming year, and the currency could plausibly depreciate by around 10% over time. Nevertheless, official GDP growth could slow below 6% next year. Worries about the economy’s health – and the authorities’ ability to manage the downside risks to activity and asset markets – may therefore cloud the outlook for some time to come (see Five questions and answers on China’s FX move on page 2 for more).
The US economy remains an engine of growth, with a rise in interest rates still on the cards this year. GDP expanded by 2.3% annualised in Q2, a modest rebound after a poor start to the year. The labour market has also made further progress, with 215,000 jobs added in July. Furthermore, housing activity remains buoyant – in contrast to last year’s weakness. A stronger US dollar and sluggish global growth are, however, weighing on exports. Net trade will likely subtract 0.6 percentage points from 2015 GDP growth, which we expect to come in at an around-consensus 2.3%. Our growth forecasts for 2016 and 2017 are slightly above-consensus at 2.8% in each year, supported by strengthening consumer spending and modest pick-ups in business investment and trade. Inflation is still very subdued, with the Federal Reserve’s (the Fed’s) preferred ‘core’ measure registering only 1.3% in the year to June. The Fed has signalled that interest rate lift-off is getting closer, though persistent China-related uncertainties could push it back.
The UK economy is also continuing to perform, but interest rates are unlikely to rise before 2016 Q1. GDP expanded by 0.7% in Q2, a step up from a surprisingly weak first quarter. The expansion was, however, very unbalanced: the service sector accounted for nearly all of the growth, while manufacturing contracted by 0.3%, its worst performance in more than two years – reflecting sterling’s strength and subdued global demand. Inflation is likely to remain close to zero for much of this year, with negative readings possible. Alongside stronger wage growth, this should deliver a substantial boost to household spending power, reflected in our slightly above-consensus forecasts for GDP growth both this year (2.6%) and next (2.8%). ‘Super Thursday’ – simultaneous publication of the Bank of England’s interest-rate decision, meeting minutes and Inflation Report – produced a less hawkish message than expected. We retain our view that rates will remain on hold this year, pencilling in a first rise in 2016 Q1 as spare capacity is eroded and (in the absence of further rises in sterling) inflation eventually picks up.
The Eurozone economy is gaining modest momentum – but risks remain. GDP growth underperformed expectations in Q2, slowing to 0.3% (from 0.4% in Q1) as Germany, France and Italy all disappointed. Alongside July’s sharp drop in consumer sentiment, this points to a fading boost from past oil-price declines; however, the further slide in oil prices in recent weeks should provide a renewed boost to household incomes and spending. News elsewhere has also been more encouraging, with indications that export growth picked up in Q2 as the euro’s weakness outweighed the effects of subdued global demand. Business sentiment is also improving, suggesting the moderate investment recovery could pick up speed during the remainder of this year. Overall, we continue to anticipate an around-consensus GDP expansion of 1.5% this year, picking up to 1.8% next. But the region’s economy remains fragile and vulnerable to shocks – whether from Greece, weakness in global trade or fallout from China’s currency moves.
Japan’s economy should avoid recession, but further policy easing is on the cards. The economy shrank by 0.4% in Q2, with weakness in consumption, investment and net exports. However, we do not expect Japan to fall into recession – two consecutive quarterly declines in GDP – at this point. The shift in the timing of bonuses from June into July and an increase in the minimum wage should provide a boost to consumption later this year. Furthermore, corporate earnings are rising strongly on the back of a weaker yen, which should feed into a revival in investment spending. And while the slowdown in China is already affecting exports, strengthening demand in the United States – Japan’s largest trade partner – should provide an offset. Nevertheless, the economy looks set to grow by just 0.8% this year overall, below the central bank’s expectations. With price pressures unlikely to pick up, a further increase in quantitative easing (QE) from ¥80 trillion to ¥100 trillion could be on the cards as early as October.
Chief Economist – Investment Solutions
Aberdeen Asset Management
This Guest Economic Insight for August is a guest post and the views here do not always necessarily concur with those of Investment Quorum. In fact, it is very often the case that we may be largely in disagreement but we respect the opinions of others and value their contribution to the wealth management debate. Guest posts may appeal more to some than others and may often have an industry, stock market or sector knowledge expectation.
The value of investments can fall as well as rise and you may not get back the full amount invested. Not all products are regulated by the Financial Conduct Authority.
If you enjoyed this article we would appreciate it if you felt able to share it via any of the social media sharing buttons below.