The Global Economy Is Running Hot

The global economy is running hot. Growth is at its strongest in more than 20 years. The economy is growing particularly strongly in the emerging markets. But other countries are also benefiting. And it looks as if the peak is yet to come. 

Global GDP is currently estimated at USD 78 trillion. This is around +35% or USD 20 trillion higher than it was ten years ago (USD 58 trillion, 2007), with the world's five largest economies contributing more than half of the total:

USA: USD 18 trillion
China: USD 11 trillion
Japan USD 5 trillion
Germany: USD 3.5 trillion
UK: USD 2.6 trillion

As in the past, emerging economies make the largest contribution to growth. With growth of 6.9%, China is creating value worth around USD 750 billion – more than, for example, the entire Swiss GDP of some USD 660 billion. But this year, economic growth is brisk in the rest of the world too. Our global growth forecast for 2017 and 2018 is +3.6% for each year.

The Global Economy Is Growing and Growing

To sum up, this amounts to the strongest global economic upturn in over 20 years. It is supported by deflationary developments in technology, demography and globalization. The decline in crude oil prices since 2014 has also been a gift to consumers worth some USD 1,500 billion. Nonetheless, US gasoline prices will rise across the country due to hurricane damages in the second half of 2017.

Our global inflation forecasts of 2.7% for 2017 and 2.6% for 2018 do not yet give an indication of overheating. Positive term structures and falling yields on inflation-hedged bonds support this picture worldwide.

Strong Growth in the Financial Markets

The climate on the financial markets has warmed even further. The MSCI All Country Index (in USD) hit a new all-time high. It has gained +12.2% since the beginning of the year, and a remarkable +34% since last year’s trough (all figures in USD). Emerging economies are profiting from the current weakness of the dollar. Highly liquid banks are supporting investment activities around the world.

This year’s hottest markets are Poland (WIG +46%), Turkey (BIST +44%) and Greece (Athex Comp +42%), but also the world’s second-largest economy, China (MSCI China +39%). The MSCI Emerging Markets is up +25% in USD since the beginning of the year.

The FTSEurofirst 100 may have gained only +6% in euros, but measured in USD, the performance is +19%. Euro investors are experiencing for the first time in a while a phenomenon that is all too familiar to Swiss investors: that there can be a painful difference between performance in local currency and a reference currency.

Forecasts for the Global Economy Remain Positive

Finally, the 36% increase in industrial metal prices is both an expression and confirmation of a global economic boom. Some observers counter that capacity reductions in China – where steel prices, for example, have shot up +130% since 2016 – have given global metal prices an artificial boost. But the huge increases from USD 11,000 to USD 21,000 in daily sea freight rates, and from 290 points to 1’350 points on the Baltic Dry Index, confirm that demand for these commodities, and their global trade, is flourishing.

Naturally, the central banks are also warming the financial market climate. Global bonds have profited, again in 2017, from generous purchases by central banks despite record-low interest rates (Citigroup World Bond Index: +8.4%). Against this backdrop, the Republic of Austria is planning to issue a 100-year euro bond. Preliminary yield indications range from 1.8% p.a. to 1.9% p.a. for a hundred years.