Can the momentum in the global economy continue

Matthew Peter, Chief Economist

Despite all the political uncertainty, momentum in the global economy continues to show signs of improvement. Real GDP growth in the G20 economies has picked-up from a 3% pace in Q2 2016 to around a 3.5% pace currently. The improvement has been geographically broad based, supported by a sharp rebound in international trade, business confidence and investment. Growth in consumer spending has been solid, supported by an ongoing improvement in labour market conditions.  

Can the cyclical recovery seen in the first half of 2017 be sustained? Last week, we finalised the quarterly update of our global economic forecasts. These forecasts remained broadly unchanged from our April update, with our global growth forecasts still at 3.5% in 2017 and 3.6% in 2018. Interestingly, these forecasts are in-line with the latest IMF forecasts released this week. 

Growth in the US economy is forecast to remain solid, despite a disappointing first quarter of 2017 and slightly lower and delayed expectations for fiscal stimulus. Growth in the US is expected to rebound from a 1.6% pace in 2016 to 2.3% in 2017 and 2.5% in 2018. Our forecasts for 2017 and 2018 have been revised up by around 20bps since April, underpinned by stronger labour market conditions, a weaker US dollar and a pull-back in expectations of protectionism from President Trump. Inflationary pressures remain subdued, although we do expect a slight pick-up in momentum in core inflation after the surprise disappointments over the past four months. In particular, we expect the core CPI inflation rate to firm from 1.7% over the year to June 2017 to 2.1% by the end of 2018. The US Federal Reserve is expected to announce the start of its balance sheet reduction program in September, and our modelling suggests this policy is unlikely to derail the Fed from also gradually raising rates. As such, we also expect the Fed to hike rates in December, followed by another 3 hikes in 2018.

The euro area has performed much better than expected over the first half of 2017. Given this momentum, we have upgraded our forecasts for euro area real GDP growth by 40bps in 2017 to 2.0%, while our forecasts for 2018 remained unchanged at 1.6%. The recovery in the region, combined with a gradual trend higher in underlying inflation, is expected to lead the ECB to start to taper its asset purchase program over the first half of 2018. However, the ECB is expected to remain cautious in lifting rates, with the first hike not expected until 2019.

The outlook for the UK remains challenging given the fallout from BREXIT and we expect soft real GDP growth of 1.5% in 2017 and 1.8% in 2018. Inflation is expected to remain elevated in the near-term given the pass-through from the sharp fall in the exchange rate last year, although we expect it to ease from around 2.9% at the end of 2017 to 2.2% by the end of 2018. The weak growth environment, diminishing inflationary pressures and heightened economic uncertainty is expected to lead the BOE to keep rates unchanged until 2019.   

Elsewhere, growth in China has been stronger-than-expected in early 2017 and we have revised up our full year forecast from 6.5% to 6.7%. However, we continue to expect growth to slow moving forward, to around a 6.1% pace in 2018, as tighter restrictions on the property market begin to weigh on construction activity. Growth in Japan is expected to remain moderate, at around a 1.3% pace in 2017 and 1.2% in 2018, underpinned by ongoing accommodative fiscal and monetary policy. 

Turning to Australia, the economic outlook remains constrained by the impending housing market downturn and elevated household debt. While real GDP growth is expected to rebound from the weakness seen in 2017Q1, growth is expected to remain modest at 2.3% in 2017 (revised down by 20bps since April) and 2.6% in 2018 (unchanged from April). Underlying inflationary pressures are expected to gradually move higher, rising from 1.8% in 2017Q2 to 2.1% by the end of 2018. In this environment, we expect the RBA to leave rates unchanged for another 12 months, with a hike not likely until at least 2018Q3. 

However, our forecasts are based on the Australian dollar falling from US$0.80 currently to US$0.73 by the end of 2018. Should the currency remain around US$0.80, then our growth forecasts would be downgraded to 2.2% in both 2017 and 2018 and core inflation would remain below the RBA’s 2-3% target range. While it is likely that the housing market risks would prevent a rate cut by the RBA in this scenario, the RBA would be forced to jawbone the currency lower and signal an extended period of unchanged rates.

Table 1: Financial market movements, 20 -27 July 2017

Equity index



10-yr government bond



Foreign exchange



S&P 500





5.1 bps

US Dollar Index (DXY)



Nikkei 225





-0.5 bps




FTSE 100





-0.2 bps









0.6 bps




S&P/ASX 200





-4.8 bps




Source: Bloomberg

Economic Update


United States

Strong factory data indicate a possible upside surprise to Q2 GDP in the US
  • Activity in the manufacturing sector recovered in June, with durable goods orders rising by 6.5% on the back of two consecutive months in decline (-0.8% in both May and April). Orders for core capital goods (excluding defence goods and aircraft), an indicator of business spending plans, declined for the second consecutive month (-0.1% marginally improving from -0.2% in May), though core capital goods shipments rose 0.2% in June, adding to an upwardly-revised 0.4% growth rate in May.
  • Consumer confidence firmed in July according to the Conference Board, whose index rose to 121.1 from 117.3 in June. Confidence in present circumstances continues to edge higher, with the index reaching its highest level since 2001. 
  • As expected, the Federal Open Market Committee (FOMC) left the federal funds target band unchanged at 1.00 – 1.25% following their meeting on Wednesday. The policy statement indicated that the FOMC planned to begin the balance sheet normalisation program ‘relatively soon’, changed from the previous wording ‘starting this year’. 

Weekly Economic Brief

Weekly Economic Brief

Euro area / United Kingdom

Survey measures ease in Europe after a strong start to the year
  • After a strong start to the year, business conditions within the euro area have eased a little, with the preliminary July composite PMI posting a decline for the second month in a row (55.8, down from 56.3 in June). The manufacturing PMI fell to 56.8 from 57.4 in June, while the services PMI was unchanged at 55.4. The services and composite PMIs are now around 6 month lows, though all three measures remain at elevated levels not previously seen since 2011.
  • The preliminary Q2 GDP release for UK came in line with market expectations, with 0.3% growth over the quarter (1.7% y/y). The release was higher than the 0.2% growth in Q1, but lower than the levels experienced in 2016.

Weekly Economic Brief

China / Japan

Unemployment remains low in Japan, with little change in inflation
  • The unemployment rate in Japan edged back down in June, hitting 2.8% after ticking up to 3.1% in May. The job-to-applicant ratio continues to lift higher, hitting 1.51 in June, a new highest level since February 1974.
  • Headline CPI in Japan rose 0.4% in year-ended terms in June for the third straight month. CPI excluding fresh food was also 0.4% higher than a year earlier, though after excluding fresh food and energy, consumer prices were unchanged in year-ended terms. 

Weekly Economic Brief

Australia / New Zealand

Inflation dips in Australia, though core measures hold up
  • Quarterly headline inflation fell to 0.2% (nsa) in Q2 from 0.5% in Q1, with the year-ended inflation rate declining to 1.9%, both below market expectations. The surprise was largely due to the food group, with an expected strong bounce in fruit & veg prices from Cyclone Debbie failing to materialise. Instead, minimal effects from the Cyclone and a larger than expected fall in prices of seasonal fruits pulled fruit & veg prices down 1.7% q/q, with overall food falling 0.2% in Q2. Core inflation continues to recover, with the average of underlying measures at 0.5% q/q and 1.8% y/y.
  • The RBA’s August Statement on Monetary Policy, released next Friday, will show whether any material change has been made to their inflation forecast.
  • RBA Governor Lowe re-emphasised the flexibility of the inflation target and risks in household balance sheets in a speech during the week. He also added that the strong labour market allows the RBA to be patient, and that the Board had not been seeking to stimulate a rapid lift in inflation.

Weekly Economic Brief

Weekly Economic Brief

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