Momentum eases in the global economy

This week we received a raft of National Accounts from across the global economy. While there were nuances between each individual economy, the clear theme that has emerged is a loss of momentum in global growth in the March quarter after a stellar 2017.

The slowdown is most apparent in Europe, where growth in the euro area slowed from a quarterly pace of 0.7% through much of 2017 to just 0.4% in the March quarter. The UK suffered a similar loss of momentum, with growth easing from a 0.4% quarterly pace in the December quarter to just 0.1% the March quarter. Across the Atlantic, growth in the US slowed from a 0.7% pace (or 2.9% quarterly annualised) to a 0.6% pace (2.3% quarterly annualised).      

How worried should we be about the recent run of data? Is this slowdown marking the end of the synchronised global economic expansion that gained traction in 2017?

In our view, we should not get too concerned about the softer outturns in the March quarter. The outlook for the US and euro area economies remain solid, while growth in emerging markets continue to recover. This week, we finalised our quarterly global economic forecasts and despite the signs of softer momentum in the March quarter in some countries, our outlook remains unchanged from the start of the year with global growth expected to average an above-trend 3.9% in both 2018 and 2019, up slightly from the 3.8% growth seen in 2017 and well above the 3.2% growth seen in 2016.

Growth is expected to be led by the US, boosted by the massive tax cuts passed by Congress in December. We continue to expect growth in the US to average 2.7% in 2018, a well-above trend pace and much stronger than the 2.3% growth experienced in 2017. The slowdown in the March quarter is expected to prove transitory, particularly the drop-off in growth in consumer spending which slowed from an exceptional 4% annualised pace in the December quarter to just 1.1% in the March quarter. In our view, the softer growth reflects the fact that many consumers did not receive the benefit of the lower taxes in their pay packet until late in the quarter. Consumer fundamentals remain strong, reflecting a low unemployment rate, solid balance sheets, elevated consumer confidence and promising signs of a pick-up in wage growth. As such, we continue to expect robust consumer spending in the US, with real consumption growth expected to bounce back from the Q1 softness to average around a 2.4% pace in 2018.

In the euro area, the March quarter slowdown reflected a number of factors. Some of these factors will prove temporary, such as poor weather across the continent and strikes in France, while others will be longer lasting including the impact of the appreciation in the euro and higher oil prices. In our view, growth in the euro area will rebound slightly in coming quarters as the impact of the transitory factors dissipates. Nonetheless, real GDP growth is expected to ease from the exceptional 2.5% pace in 2017 to 2.1% in 2018; still well above the potential growth of the region and enough to continue to drive unemployment rates lower. 

In the UK, the slowdown in the March quarter was also partly due to the cold weather, which contributed to a 3.3% drop in construction activity. However, the softness is not solely due to weather effects, with ongoing uncertainty around BREXIT, the recent appreciation of the UK pound and the impact of elevated inflation undermining consumer purchasing power all playing a role. While we expect growth will rebound to around a 0.4-0.5% quarterly pace over the remainder of 2018, the softer March quarter outturn has led us to cut our 2018 growth forecast from 1.7% to 1.3%, a marked slowdown from the 1.8% growth seen in 2017. Overall, we continue to expect below-trend growth in the UK due largely to the fallout from BREXIT.

The improving global outlook has had a significant impact in supporting the Australian economy. It has helped support the terms of trade, our national income, government tax collections, corporate profitability and exports. These global tailwinds should continue to support our domestic outlook and we retain our view that Australian growth will firm from a 2.3% pace in 2017 to a 2.7% pace in 2018 and 2.8% in 2019.

Table 1: Financial market movements, 26 April - 3 May 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,629.7

-1.4%

US

2.95%

-3.5 bps

US Dollar Index (DXY)

92.41

0.9%

Nikkei 225

22,472.8

0.7%

Japan

0.05%

-1.5 bps

USD-JPY

109.19

-0.1%

FTSE 100

7,502.7

1.1%

UK

1.39%

-11.4 bps

GBP-USD

1.358

-2.5%

DAX

12,690.2

1.5%

Germany

0.53%

-6.1 bps

EUR-USD

1.199

-1.0%

S&P/ASX 200

6,098.3

3.2%

Australia

2.81%

-5.2 bps

AUD-USD

0.753

-0.3%

Source: Bloomberg

 

For economic update by region, click here.

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