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Economic Outlook: Growth Upswing Broadens Amid Benign Inflation

Growth in the advanced economies is still going strong. Subdued inflation will likely allow only very gradual steps of policy tightening in the advanced economies.

The current strength of the global economy continues to defy expectations of a slight softening. Judging by business surveys, growth actually ticked up slightly in the Eurozone and the USA in August. Perhaps more importantly at this stage of the cycle, growth in the large emerging markets (EMs) such as China and India picked up as well, driving sentiment in the EM manufacturing sector to the highest level since early 2013. In addition to converging growth momentum, there also appears to be a convergence in inflation between the emerging and advanced economies: while inflation is still relatively subdued in the advanced economies, it is declining quickly in the EMs toward often historically low levels. This opens the door for further monetary policy accommodation in some EMs, while the process of tightening will remain slow in the advanced economies.

US Growth Remains Solid

The US economy remains on an overall robust growth track, supported by both private consumption and investment. Conditions on the labor market are still improving, even if momentum appears to have softened lately. In the short term, the devastating and disruptive effects of this year's hurricane season are likely to cause volatility in economic activity data. However, past experience shows that these effects are only temporary and that setbacks are typically followed by a rebound. At its 20 September meeting, the US Federal Reserve (Fed) is likely to announce that it will start reducing the size of its balance sheet. This has become more likely now that the topics of the debt ceiling and government funding have been postponed to mid-December.

The topic of broader tax reform should thus quickly enter the policy agenda. We still expect the Fed to hike rates again in December, but acknowledge that continuously sluggish inflation and potentially contentious debt ceiling and budget debates that coincide with that Fed meeting represent risks to this outlook.

ECB on Path to Slowly End QE

The growth picture in the Eurozone remains strong, with business surveys even suggesting a slight acceleration. At the same time, inflation has, at the margin, surprised to the upside, while the unemployment rate is declining at a pace of roughly one percentage point per year. The ECB remained on hold at its September meeting, but did indicate that it had started to review how to "taper" asset purchases in 2018. A comprehensive decision will likely be taken at the October meeting.

We expect the pace of purchases to be reduced from 60 billion Euro to 45 billion Euro per month starting in January 2018, with further reductions each quarter; the program would thus end by Q3 2018.

EM Momentum Catching Up with Advanced Economies

Growth also appears quite robust in the major EMs. Chinese data already surprised in H1, but August signaled that momentum may actually have increased somewhat. India's growth, which was temporarily hit in July following the introduction of a new goods & services tax, should benefit meaningfully from the new tax system going forward. The recovery in both Russia and Brazil is continuing, though at a rather moderate pace. Recent declines in inflation should pave the way for further monetary easing in both countries.