May 1, 2017 / 8:54 PM / in a year

COLUMN-It doesn’t get any better than this (it gets worse): James Saft

(The opinions expressed here are those of the author, a columnist for Reuters)

By James Saft

May 1 (Reuters) - For the global economy it doesn’t get any better than this, which is a different way of saying it gets worse.

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 risk assets.

“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 spring.”

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.


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 fiscal expansion.

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) )

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