Global Economic & Markets Factbook, October 2016: Key Takeaways
Concerns are rising over the future growth potential of a world economy suffering from high debt, political angst in advanced economies as middle class expectations are revised down, and with fiscal and monetary policy running out of space to manoeuver.
Regarding the short-term outlook, US GDP is expected to accelerate slightly following a disappointing first half, while modest fiscal easing should support activity in Japan. Euro area growth remains moderate, while, in the UK, the consequences of the “Brexit” vote appears less severe than expected. In China, the gradual transition of the economy continues, albeit rapid growth of private sector debt and the housing market boom pose risks.
Monetary policy appears at a crossroads. The Bank of Japan shifted its focus to yield-curve targeting and the ECB is ready to expand its asset purchases, probably by end-year. Economic data would need to deteriorate significantly for the Bank of England to cut its policy rate further. On the other hand, the Fed will likely increase rates in December, barring a significant deterioration in high-frequency indicators.
Political uncertainty remains, with the US Presidential elections the main focus. The Clinton candidacy appears to be gaining the upper hand. The fragile European recovery could be derailed by the Italian referendum on Senate reform, the elections in France and Germany, as well as “Hard-Brexit” negotiations.
In this environment, equities remain vulnerable, as their valuations are on the high side. We remain cautious regarding Government bonds, as nominal yields are expected to increase, albeit from an exceptionally low base, due to Fed tightening and increasing inflation. Corporate bonds, particularly in Europe, still offer value as the ECB and BoE purchase programme may lead to spread tightening, albeit higher yields on core government bonds could threaten the positive credit performance.