Oil price boosts global growth
The global economy is performing broadly in line with expectations; the main news is the slump in oil prices. The US economy is expanding at a steady pace and the labour market is gradually healing. Policies will become more restrictive as a result. The eurozone picture is completely different and warrants bold steps to reflate the ailing economy. In China, data suggest a softer economy. That is not a major problem: the longer-term outlook is the main concern.
The US continues to perform well. Activity is steadily expanding, while the labour market is healing gradually. Globally-active US companies remain competitive abroad and have delivered a major contribution to growth in recent years. As the first Fed rate hike for many years approaches, the composition of growth may change, as a stronger dollar is expected to dent the competitiveness of US exports. Nevertheless, the US recovery is sufficiently self-sustaining and broad-based to overcome such challenges in the years ahead, in our view.
The case for US resilience rests not only on the fact that many businesses have proved so adept at taking advantage of the global economy. The home front is also important. In that context, we are encouraged by a steady decline in the unemployment rate, something that will eventually lead to higher wages. Along with US households able to repair their balance sheets, it suggests a solid backdrop for private consumption. For both external and domestic reasons, companies also have reason to invest.
There has been a sustained stock market rally in recent years. That may be seen as confirmation that the US economy is improving, but it also poses risks. In our view, the first hike in the policy rate for years is now just a couple of months away. Capacity utilisation is rising. Even if inflation remains low, now aided by low oil prices, the Fed is likely to want to forestall a problem further down the road. Taking away the punch bowl in a timely fashion, we would argue, would also avoid frothy financial markets getting too carried away.
In Japan, the central bank has provided massive stimulus to put an end to deflation. Corporate profits and wages have increased, while companies have become more willing to invest. A weaker yen has played a major role in this regard.
The eurozone economy is still in trouble. Corporate profits are very weak, reflecting depressed domestic demand within the monetary union and a general lack of pricing power. The willingness to invest and expand employment suffers as a result. Major structural and systemic problems have to be addressed. In the near term, though, there are also important steps for the ECB to take to alleviate the disappointingly weak economy.
To ignite a recovery that comes close to that of the US and Japan, policymakers must take bold steps to weaken the euro. Europe no doubt benefits from lower oil prices. However, that cannot be seen as much solace. While eurozone consumers gain from recent oil market developments, exporters lose, as oil exporters such as Russia cut spending.
Stronger global demand will therefore not be the solution to the problems within the eurozone. It is time for the ECB to finally gets its act together and reflate the economy through decisive measures to expand its balance sheet.
In the UK, the economy has progressed in a more positive manner. As in the US and Japan, monetary policy has played a crucial role in boosting the economy. We count on further UK outperformance in the years ahead.
China faces important challenges. In the near term, the slowdown that has been underway for some time has become more pronounced than expected. Financial risks are also accumulating. The authorities carefully try to tread a line between the need to support activity through targeted monetary policy measures while avoiding wholesale credit easing for fear of financial instability. We remain reasonably confident that this delicate balancing act is feasible in the short term, but we nevertheless lower our growth projections for China marginally.
The longer-term outlook is a greater concern. The ambitious reform plan, announced with much fanfare a year ago, has hardly got out of the starting blocks. While President Xi’s honeymoon now seems over, resistance to change is strong. That raises the issue of whether China will be able to take its economic development to a new level, moving from “imitation” to “innovation”, a challenge it shares with other emerging economies. It is too early to call the shots on that one, but it is certainly a question worth pondering.
Other major emerging economies have more immediate problems. In Russia, the outlook for the economy has gone from bad to worse, mirroring the sharp fall in oil prices. As could be expected, the rouble has weakened dramatically. The weak economy in Russia is also a problem for Europe given that the country is an important destination for the region’s exports. Brazil is another country that stands to lose from the fall in oil prices. By contrast, we are still upbeat on Asia, including India.
Sweden grabbed the attention in the autumn, following the indecisive result in September’s parliamentary election. The country’s usual reputation for relative political consensus-based decision-making seems less warranted now. After the budget proposal failed in the Riksdag, the new left-of-centre minority coalition called snap elections for March. However, it is not clear to what extent that will help pave the way for a more viable government. Meanwhile, economic policies are on hold.
It leaves monetary policy in the driver’s seat. The economy is still strong, both compared to the other Nordic countries and Europe as a whole, despite starkly different views among leading politicians. Combined with likely higher import prices, the result of further dollar strength, rising capacity utilisation implies that the Riksbank is likely to raise its policy rate again, earlier than many – including the central bank itself – seem to believe.
For further information, please contact:
Jan Häggström, Chief economist, +46-8 701 10 97, +46 70 761 43 66