Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

GROWTH AND INFLATION: A NEW NARRATIVE?

In the second half of 2016, the growth premium favored Developed Markets (DMs) vs Emerging Markets (EMs) – with DMs regaining the macro momentum lost in the first part of 2016. We now expect DMs and EMs to display similar, moderately paced GDP growth going forward.

The US, Eurozone and Japanese economies have been accelerating while the UK has shown a certain degree of resiliency, so far, in the wake of the UK Referendum. At the same time, China’s growth is holding up well and the commodity space has steadied, allowing EM economies to maintain their overall momentum.

The growth outlook for 2017 is constructive, but still lacks a structural engine to make growth sustainable and inclusive over the long term, with a proper increase in productivity rates. Monetary and fiscal levers will be necessary to keep economies moving forward. Household consumption, together with exports, are leading the way as there is the right mix of exported products and country exposures, but private capex continues to struggle.

GDP Growth Outlook 2016-2018

Source: Pioneer Investments’ forecasts. Data as of December 16, 2016.
Source: Pioneer Investments’ forecasts. Data as of December 16, 2016.

Inflation dynamics are finally creeping upward as base effects kick in. In 2017, inflation rates will be driven by the cost side more than demand pressure. Only in the US will an inflation rise be supported by some overheating in the economy, with pressure coming from a labor market in full employment and increased fiscal stimulus coming from the newly elected President. In Europe and Japan, inflation levels should increase mildly, while likely remaining well below Central Bank (CB) targets. In EMs, the inflation outlook is very benign, with levels expected to approach or to stay within CB targets. (Please see attached graph – GDP Growth Outlook 2016-2018)

In the case of China, risks to the inflation outlook are to the upside. Producer price indices are rising, but are expected to remain under control absent another strong year for global commodity prices.

On Central Banks we believe that the US Federal Reserve faces no particular constraint as it pursues the normalization of monetary policy. In fact, the effort might be slightly accelerated by the incoming President’s economic policy. The rest of the DM space is expected to keep a very accommodative monetary policy stance for the time being: inflation in Europe and Japan is still low or very low, while in the UK, although inflation is expected to go above target soon, an easing stance is supported by possible economic deterioration related to Brexit implementation.

The Federal Reserve’s stance is acting as a constraint on easing within the EM space. In most EM countries, GDP is growing below potential and inflation is heading towards CB targets. These domestic macro conditions are conducive to a certain degree of monetary easing; however, tighter global financial conditions will prevent this much needed policy shift, in our view.

Fiscal Policy

Monica Defend,Head of Global Asset Allocation Research, Pioneer Investments.
Monica Defend,Head of Global Asset Allocation Research, Pioneer Investments.

We think that 2017 will be the year when the emphasis will shift from monetary to fiscal policy. As noted earlier, global monetary policy is becoming slightly less accommodative as the Federal Reserve pursues normalization, but the overall stance will likely remain accommodative. On the fiscal side the stance will become easier, to widely varying degrees country-by-country. However, the path to fiscal easing will not be an easy one. Debt has piled up since the Great Financial Crisis and, for the sake of stability and to preserve future growth, monetary policy has carried the burden so far.

The newly elected US President appears to be acting as a further catalyst for the ongoing global debate on fiscal policy. While the outlook on fiscal policy implementation in the US is uncertain, the focus is expected to be on tax rationalization and reduction, in the short-term, rather than on direct expenditures. As a result, we expect any near-term rise in GDP growth to be only marginally tied to addressing productivity.

In Europe, expectations remain very low with respect to any broad and significant easing on the fiscal side. Although, in some countries we have seen less reliance on fiscal policy due to continued weak macro conditions.

Japan continues to implement the ambitious fiscal package announced last August: a decent Second Supplementary Budget (around 0.6% of GDP) was approved in 2016, with some impact expected in 2017.

In EMs, the principal constraint is represented by the outlook of rating agencies on fiscal sustainability for each country. However, conditions are very heterogeneous; those countries that can afford it, being less fragile, are ready to use the fiscal lever. Commodity performance is a useful parameter to evaluate winners and losers among exporters and importers. In China, fiscal easing will remain strong and supportive, especially if signs of a slowdown return.

Even though we expect slightly stronger economic growth in 2017, we continue to see a number of structural risks on the radar mainly linked to the Fed normalization path, US policies on geopolitics, Eurozone politics and the China mismanagement of the transition and reforms.