Economic & Strategy Viewpoint
Economic and Strategy Viewpoint - November 2017
This month, our economists puzzle over the lack of inflation in a buoyant global economy, and weigh the difficulties investors face in assessing political risk and emerging market exposure.
Global: Firing on all cylinders
– The improvement in the world economy has been given the official seal of approval by the IMF which has just revised up its projections for global growth. Whilst such forecasts can be seen as lagging indicators, there are signs that global growth will be sustained as the capital spending cycle kicks in.
– However, despite the strengthening of activity, inflation remains quiescent creating consternation amongst policymakers whose models would have predicted a pick-up in wage and price pressure. We look at some of the structural differences behind this and conclude it is too early to ditch the Phillips curve.
Eurozone: Political risk still simmering
– Though many of the major political obstacles have now been overcome, events in Spain highlight that political risk continues to simmer under the surface. Elections in Austria, the Catalan situation, and recent referendums in Italy all highlight a trend towards populist, nationalist and now regionalist tendencies.
– These risks are contained for the moment, helped by quantitative easing (QE), and the boost this brings for the economy and financial markets. The European Central Bank is set to keep QE going into 2018, but will eventually phase out the policy over next year.
EM: Can diversification protect against contagion?
– Diversification should reduce risk by insulating portfolios against country specific risks. Yet historic EM correlation suggests this might not always be the case, and today’s low correlations are an anomaly.
Views at a glance
– A short summary of our main macro views and where we see the risks to the world economy.