It is a rare moment in the global economy. After years and years with bad headlines Europe is now the main provider of good news. Growth is surprising to the upside, our models are the most upbeat since 2009, consumers are finally spending money and monetary policy is adding lots of fuel. Not surprisingly, asset markets are booming.
Looking to other regions the picture is less positive: across the Atlantic the US economy has been sputtering lately. The main pillar of strength is the labour market but this means that the Fed is likely to raise rates later this year, which has caused jitters in the US stock market and Emerging Markets assets. Looking to the east, Russia is in steep recession and China has still not recovered from last year’s slowdown. The signs of Chinese stabilisation were erased by the March decline in HSBC (LONDON:HSBA) HSBA PMI (for an update on global economic data see page 3). Finally, this week’s data out of Japan were mixed with a decline in PMI and disappointing retail sales.
Stock markets took a bit of a hit from the rising uncertainty over growth outside Europe. Especially US stocks looked soft as they corrected after failing to rise to the recent high from early March. Euro stocks also corrected but this is happening after a very strong rally that took the market to a short-term overbought level, so a small correction here is only natural. We continue to be positive on risk assets.
First, global growth is expected to be decent this year. While the US economy is looking softer, we see good reasons for growth to recover in the coming quarters. The US weakness comes after some very strong quarters in Q2 and Q3 last year and as such is part of a normal pattern of growth fluctuating around 2.5-3% with stronger and weaker periods. Part of the Q1 slowdown is weather-related as the winter was especially harsh in February. Fundamentals for the US economy are still robust with gasoline prices staying low, house price gains picking up again and very solid job gains. Growth will be tempered by the strengthening of the USD and lower investments in the energy sector but we believe the balance of factors still points to underlying growth of 2.5-3%. China is expected to ease policy further to make sure the 7% growth target is reached. This should imply a gradual recovery in coming quarters. In the case of Japan growth is expected to be neither strong nor weak this year so it is unlikely to be a swing factor for the global economy. Russia will remain a big drag but the economy is not big enough to hamper global growth.
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