Global Economic Monitor Q3: Fed to Tighten, China to Stabilize
The global economy appears to be at an important crossroads: the healthy state of the US economy suggests that the Federal Reserve (Fed) will likely tighten monetary policy. At the same time, weak data from China has re-ignited worries over global growth, especially regarding the impact on a number of close trading partners.
The US economic recovery has gained traction as continued gains in the labor market have boosted consumer sentiment and spending (see chart 1). Given still low interest rates, easy credit conditions and low energy prices we expect this trend to persist. Moreover, residential investment has recovered and the scope for further improvement appears substantial as the level of new housing starts is still very low while an increase in family formation should boost demand. The weak point are exports which are suffering from low growth in emerging markets and the strong dollar.
The US labor market has improved substantially, which should ultimately lead to wage pressures
Source: Datastream, Credit Suisse
Stabilization Expected in China
While the Fed will likely tighten monetary policy going forward, the world’s second largest economy, China, is still on a course of further policy easing. Some of the recent economic data has shown renewed weakening, while other data points have remained more stable, especially retail sales. Importantly, the real estate market is also showing signs of stabilization. But as China continues to transition from investment–and export–driven growth toward domestic consumption and a services economy, while at the same time facing a cyclical slowdown, further fiscal and monetary easing measures remain necessary. These measures should bring about stabilization and eventual re–acceleration of the economy.
Eurozone Economy to Continue Growing
The outlook for the Eurozone recovery remains fairly favorable as domestic demand continues to recover. Credit growth continues to accelerate and pent–up demand is still considerable (see chart 2). Despite the improving growth outlook, the European Central Bank (ECB) is coming under renewed pressure to act as the outlook for inflation has weakened again. The ECB has also announced measures which will, in principle, allow it to extend the QE program beyond September 2016. While a formal extension is unlikely to be announced soon, the probability of an extension has increased markedly.
Credit demand in the Eurozone has increased substantially
Source: Datastream, Credit Suisse
Most Emerging Markets Doing Badly
Apart from China, many other emerging markets are also showing signs of continued weakness. Some are suffering heavily from low prices and weak demand for commodities (especially Russia and Brazil), others from lower demand for intermediate goods from China. Many emerging markets are also in a prolonged de–leveraging process as excessive credit creation proved unsustainable. Finally, currency weakness has translated into high inflation in some countries and has required central banks to tighten policy substantially, thus further weakening growth.
For a more detailed assessment on the global economic outlook, please refer to the publication "Global Economic Monitor Q3: Fed to Tighten, China to Stabilize" by Credit Suisse Research (not publically available).
