Natixis Global AM: El estado de la economía global (Market Insights)

Redacción - Lunes, 30 de Enero

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State of the Global Economy Experts examine growth accelerators and deflators for the global economy, plus market and portfolio implications in 2017. Global growth sputtered along at about 3% for 2016. After another year of disappointing economic expansion, could there be a catalyst in 2017? Are tax cut and infrastructure spending promises made by U.S. President Donald Trump enough to jump-start the global economy? Could stabilizing commodity prices propel emerging markets? Or will geopolitical risks cause a slowdown? A chief economist, market strategist, and research analyst from across Natixis Global Asset Management take a look at growth accelerators and deflators around the globe, and their implications for markets and portfolios.

State of the Global Economy

Global growth sputtered along at about 3% for 2016. After another year of disappointing economic expansion, could there be a catalyst in 2017? Are tax cut and infrastructure spending promises made by U.S. President Donald Trump enough to jump-start the global economy? Could stabilizing commodity prices propel emerging markets? Or will geopolitical risks cause a slowdown?

A chief economist, market strategist, and research analyst from across Natixis Global Asset Management take a look at growth accelerators and deflators around the globe, and their implications for markets and portfolios.

Dave Lafferty, CFA
Chief Market Strategist
Natixis Global Asset Management

The global economy is showing nascent signs of improvement. In the U.S., we estimate that real GDP will have accelerated from just over 1% annualized in the first half of 2016 to over 2.5% in the second half. This is before the Trump Trifecta of infrastructure spending, lower tax rates, and deregulation potentially kicks in. All of these, to varying degrees, should put upward pressure on real U.S. growth in 2017.

However, investors shouldn’t become overly optimistic. Most of the benefits to any infrastructure program will occur after 2017. They may also be limited by fiscal pressure coming from Congress, or provide only a short-term boost if not designed to improve long-term productivity. Lower personal tax rates should increase consumption but will also be constrained by deficit hawks. Lower corporate tax rates and discounted repatriation of foreign earnings should bolster capital expenditures, but these cuts may be partially offset by repealing other corporate deductions.

Activity in Europe picking up

Outside the U.S., growth is also beginning to slowly pick up steam. Activity measures across continental Europe are improving, while the UK has yet to feel any significant economic pain from the Brexit vote (with the emphasis on “yet”). After stumbling a bit, growth in China appears to have stabilized for the near term while policymakers wrestle with the trade-offs between economic reform and excessive credit expansion.

Better growth prospects for China and EM

China’s stabilization has in turn heightened growth prospects for emerging markets in general, compounded by the rebound in commodity prices. While the overall outlook for growth globally is improving, the underlying supply-side constraints remain in place. These include economies saddled with excessive debt, poor labor demographics, and stagnant productivity. Most importantly, stronger growth is likely to come with increased inflationary pressure which will put central banks on greater notice. Too much inflation could push up nominal rates further out the yield curve while policy accommodation wanes at the short end. The macro landscape is set to improve, but investors should expect the “Trump Train” to pull out of the station very slowly.

Modestly stronger global growth should create improving fundamentals for risk assets like stocks and corporate bonds of all types. These improving fundamentals will only partially translate into higher prices, as valuation has become more of a headwind in these sectors. High-quality sovereign and agency debt will remain under pressure, although we believe bond yields will rise only modestly. The

U.S. dollar may strengthen, but less than current consensus, as the 30% jump in the greenback since mid-’14 already reflects the known policy divergence of central banks.

Geopolitical risks are looming

While we expect modest improvement in the global economy and reasonable (if unspectacular) returns for risk assets, this belies an even larger shift in geopolitical and market risks. The new and inexperienced Trump administration will be tested on multiple fronts including Russia and China. Brexit negotiations are shaping up to be ugly while elections in France and Germany will test the long-term viability of the euro zone. Syria and Turkey remained mired in crisis. Investors would be wise to recognize that short-term volatility often overpowers improving fundamentals. This burgeoning uncertainty represents an opportunity for true long-term investors, but is likely to cause heartache for the more risk-averse.

Gregory Hadjian
Research Analyst, Macro Team Loomis, Sayles & Company

We are modestly optimistic about the outlook for the global economy in 2017. The negative shock from the collapse in commodity prices has dissipated, policy measures have supported growth in China for now, and two major political events in developed markets, the Brexit vote and the U.S. presidential election, have passed, even if the implications remain unclear.

Uptick in global growth

We expect global GDP growth to accelerate to 3.25% in 2017 from 3.0% in 2016. Growth in emerging markets, while still below-trend and choppy, we think has bottomed, and key emerging market countries such as Brazil and Russia could emerge from recession in 2017.

In the second half of 2016, we observed a cyclical pick-up in global growth as the economy in China stabilized and commodity prices recovered, accompanied by a dovish shift in U.S. monetary policy in February. Global Purchasing Managers’ Indexes (PMIs) have registered sustained increases and stand at levels that imply robust economic momentum, particularly in developed markets, and economic data has surprised to the upside. We see evidence that global manufacturing is recovering and that the inventory cycle is turning in support of growth, reflected in rising inventory investment and new orders- to-inventories ratios. In the U.S., the corporate profits recession appears to be over, and the strong labor market underpins domestic demand.

Against the backdrop of the underlying recovery in global growth, the outlook for 2017 hinges on questions around the policy mix. A shift to fiscal policy stimulus in advanced economies could boost global demand. In the U.S., our view is that the impact of fiscal policy will mostly be felt in 2018. We expect monetary policy in the euro area and Japan to remain accommodative.

China, inflation, populism top risks

Key macro risks for 2017 center on China’s economy, policy outcomes under the new U.S. administration, global financial conditions, and European politics.

  We remain concerned about capital outflows in China, the devaluation of the currency, and financial stability risks. Chinese policymakers prioritized growth over reform last year; renewed attention on reform, implying less credit creation, could catch markets off-guard.

  In the U.S., we think that the range of potential economic outcomes has widened under the incoming administration. A material fiscal easing, delivered in excess of market expectations, presents upside risk to U.S. growth and, by extension, global growth. However, with the U.S. economy already close to full employment, the introduction of fiscal stimulus could put upward pressure on inflation, prompting the Federal Reserve to tighten policy more quickly than priced in by the market.

  A stronger than expected rebound in inflation could drive interest rates and potentially the U.S. dollar higher, leading to a tightening in global financial conditions, which would weigh on global growth and hurt emerging markets reliant on external borrowing.

  The rise of populism and the pushback against international trade is a major economic risk, threatening to disrupt global supply chains and stoke inflation. For now, our base case is that President Trump does not ignite a global trade war despite protectionist rhetoric.

  Finally, markets will focus on upcoming elections in the Netherlands, France, and Germany as tests of European integration in the wake of Brexit.

We view the risk of a recession in the U.S. as low currently, having declined materially from early 2016. Strong points for the economy include housing, construction outside of the oil sector, and state and local government purchases. The nonfinancial corporate sector continues to exhibit deteriorating credit quality, but the recovery in profits along with the potential for stimulus spending, tax cuts, and deregulation could give new breath to the economy and extend the cycle.

Based on our view that the Fed hikes twice in 2017, in June and December, which is similar to market expectations, we would be neutral Treasury duration. We are moderately bullish on the dollar assuming looser fiscal and tighter monetary policy, and see room for further appreciation. Equities should continue to do well in 2017. We prefer U.S. equities over many global markets given more clarity around the profits story in the U.S.

Philippe Waechter
Chief Economist
Natixis Asset Management
As we enter 2017, the global economy appears to be getting better. However, the framework is now very different from what we had in mind before the 2007/2008 global financial crisis. Trend growth is lower than it used to be and inflation rates remain low. As a result, I believe interest rates in the developed world will stay low and monetary policies accommodative, even in the U.S., for most of 2017.

Over the past few years, the global economy has taken advantage of stable fiscal policies in western countries, very accommodative monetary policies and low oil prices. At the same time, the growth deceleration and China’s new domestic-focused economic strategy have limited pressures on western countries. The consequence of this framework is that the private sector in Europe and the U.S. has been able to adjust their behavior according to their own constraints. However, they have not yet adapted their behavior for a change in fiscal policy (as was the case in 2011–2013 in Europe and the U.S.) or for more competitive Asian products.

For emerging countries, the main source of uncertainty remains in the role of China. China’s new economic model, which is focused on its internal market versus its old export-driven economy, has weakened emerging countries. This is most notable in Africa and in Latin America, where Brazil and Argentina have suffered deep recessions. In Asia, links with China are closer and the region has not been as negatively impacted.

Lingering low inflation

In the euro area, the inflation rate should remain below the European Central Bank’s (ECB) target of 2% (except at the beginning of the year during which a base effect on oil price feeds inflation – but this will be a temporary effect). In the U.S., after a long business cycle that started in Q2 2009, there have been no tensions on wages or prices. In the near future, the U.S. inflation rate will likely creep above the Fed's target rate of 2%. In the United Kingdom, inflation appears to be moving higher after the depreciation of sterling following the Brexit vote, but just above the central bank target (I expect 3% at the end of this year). In the emerging countries, inflation rates remain low, as well. Even in Brazil, inflation is receding after a peak at the beginning of 2016.

Where’s the growth?

In past economic cycles, world trade was a source of growth impulse. Unfortunately, that is no longer the case. As a result, the U.S. and China are no longer able to play the role of locomotive for the global economy. Currently, world trade growth is below 1% in volume, as of the end of October 2016. This means that each country or region has to create its own growth.

Potential sources of growth could come first in the U.S. if tax cuts are enacted swiftly, as promised by President Trump. This measure should boost domestic demand. If that happens, however, the Fed may feel the need to hike interest rates.

The other potential source of stronger growth is the euro area. The stable fiscal/monetary policy mix for the last couple of years and low oil prices have helped the recovery. Companies surveyed at the end of 2016 appeared to be bullish. As trade between countries of the euro area is very dense, we could have a spillover effect leading to stronger growth. This type of improvement was seen in the second half of the ’80s and of the ’90s. This profile is not sure yet, but that’s something I’m closely watching.

Where’s the risk?

The main source of risks, I believe, will be the consequences of what has happened in 2016. The Brexit will really take place after March 2017. Rules between the UK and the European Union will change and have an impact on the business cycle on both sides of the Channel.

Higher uncertainty is due to the probable change in the single market access. This will probably be a real challenge in the short run for U.K. companies. In the longer run, the withdrawal of the European passport could be a source of weakness for companies based in London to develop their business in Europe outside the U.K. The impact of Brexit will be more important in the U.K. than in Europe, but it changes the picture. Before the referendum, there was a mindset that coordinated and cooperative strategies were necessary to converge for a stronger economic profile. But U.K. voters said “No, we can do it alone.”

Another source of risk is the U.S. trade policy. Trump said a lot during the campaign about higher tariffs for different countries (China, Mexico). This would be a negative shock for the world trade and would have a negative impact on the global economic momentum.

Finally, geopolitical risk in Europe needs to be considered. With Putin on one side and Trump on the other, the situation for Europe could become more complex. The U.S. umbrella will probably be less efficient as Trump doesn’t want to pay for Europe. Europe has to gather its strengths in this new environment. The German/French alliance has to work well in order to improve the European political situation. The future of Europe depends on working together, even if the support from the U.S. is weaker than it has been in the past. Elections in France, the Netherlands in Spring and Germany in September will be critical for the European construction.

Bond yields are the amount of return an investor will realize on a bond.

Brexit refers to Britain voting on a referendum June 23, 2016 to exit the European Union, which is a

unique economic and political partnership between 28 European countries.

Central banks are national banks that provide financial and banking services for a country's

government and commercial banking system, as well as implementing the government's monetary

policy and issuing currency.

Commodity is a raw material or primary agricultural product that can be bought and sold, such as

copper or coffee.

Credit is a contractual agreement in which a borrower receives something of value now and agrees to

repay the lender at some date in the future, generally with interest.

Dovish means that a policymaker is in favor of maintaining low interest rates to stimulate the

economy. They are not particularly worried about inflation. The opposite of a dove is a “hawk”.

Euro is the official currency of the euro zone, which consists of 19 of the 28 member states of the

European Union.

Fed refers to the Federal Reserve System, the central banking system of the United States of America.

Global Financial Crisis of 2007–2008 is considered by many economists to have been the worst

financial crisis since the Great Depression of the 1930s.

Populism refers to a political party claiming to represent the common people.

Pound sterling (GBP) is the official currency of the United Kingdom. It is commonly known simply as

the pound.

Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing

sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier

deliveries and the employment environment.

Recession refers to a period of temporary economic decline during which trade and industrial activity

are reduced, generally identified by a fall in GDP in two successive quarters.

Sovereign debt is issued by a national government in a foreign currency in order to finance the

issuing country’s growth and development. Agency debt is a security issued by a U.S. government-

sponsored agency or federal budget agency. United States Treasury securities are government debt

instruments issued by the United States Department of the Treasury to finance the national debt.

Volatility is the degree of variation of a trading price series over time. Yield is the income return on an investment.

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