(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
May 1 For the global economy it doesn’t get any
better than this, which is a different way of saying it gets
While the International Monetary Fund is calling for a
gentle pickup in growth next year, up one tenth of a percentage
point to 3.6 percent, consensus among private-sector economists
shows most leading economies peaking early this year.
Forecasts show the U.S. peaking in the second quarter and
China, the euro zone, Japan, Britain and South Korea all having
already topped out in the first quarter. Only India, Brazil and
Russia will accelerate into 2018.
This will be a slowing of growth, not a downturn, but one
which will come, given the very parsimonious management of
capacity by industry, along with some pickup in inflation and
thus interest rates.
Not a disaster, but slowing growth and rising inflation and
interest rates are not a classic recipe for a bull market in
“To see upside surprises to the consensus growth outlook
outlined above would to our minds require a significant
expansion of credit – this could come from households,
non-financial corporations and/or governments,” Michala
Marcussen, global head of economics at Societe Generale, wrote
in a note to clients.
“With growth most likely at the peak and central banks set
to tighten, that to our minds entails that the peak sweet spot
of firm growth and ample liquidity is essentially peaking this
Looking at the surveys of loan officers by central banks in
Japan, the euro zone and the U.S. shows no real reason to expect
an uptick in either demand or availability of credit. And while
consumers have still added to loan balances at a healthy pace in
the U.S., there are signs that some banks are becoming
increasingly cautious, particularly in auto lending.
In the U.S. there is a possibility that a loosening of
regulation by the Trump administration might also prime the
credit pump, but, as with all things in this administration,
this is a matter of speculation. Nor is it clear that tax cuts
or a foreign cash repatriation holiday would actually lead to
capacity expansion by U.S. firms.
The last time the U.S. adjusted the tax system to put more
cash in corporate coffers, it went more towards financial
engineering, in the form of share buybacks, than investment in
plants or people.
FRUITS OF PARSIMONY
As for a fiscal expansion - probably not coming in the euro
zone or, in a meaningful way, in Japan. Trump on Monday told
Bloomberg he would consider a rise in the gasoline tax to fund
infrastructure spending, but Tuesday and Wednesday may bring a
different story. The Trump tax plan, such as it is, would
increase the deficit and place more cash in the hands of the
wealthiest, but this seems more likely to drive prices in art
and vacation homes than do much for overall output. That is if
you expect the plan, as it is, to come to reality.
It is hard, in sum, to bet that the U.S. gets a boost from a
And don’t look to China for a credit-driven further
expansion. China is not only tightening monetary conditions
subtly, it appears to be getting serious about loose lending.
The China Banking Regulatory Commission has been making pointed
checks into bank risks and exposures from off-balance sheet
lending, which has accounted for much of the credit growth
there. Regulators are also applying pressure in China to real
estate lending, another area which had driven growth, both in
credit and economic output.
A look at IMF estimates of capacity utilization in the main
economies shows that most are running reasonably high, in
historical terms. This is the fruit of a much more aggressive
attitude towards capital expenditure and corporate management,
one which, again, favors balance-sheet alchemy over investment
in research or a company’s core franchise.
So, a bit of inflation will be added to the mix, though
certainly not too much, especially as the Fed tries to both
boost interest rates towards 'normal' and begin to manage its
own balance sheet of acquired assets downward.
The upshot for markets is that risk assets will face
headwinds, with a best-case scenario perhaps being a set of tax
cuts in the U.S. and a surge in share buybacks.
Look around, and enjoy it; a gentle slope it may be, but it
is all downhill from here.
(Editing by James Dalgleish)