MOSCOW BLOG: This is as good as it gets

MOSCOW BLOG: This is as good as it gets
By Ben Aris in Berlin October 11, 2017

This is as good as it gets. That was the conclusion of Fitch Ratings’ Global Economic Outlook for September 2017. The global economy is in a bit of a sweet spot as the bounce-back growth is strong and the last of the 2008 crash effects are fading away.

Commodities prices are high and growth in both developed and emerging markets is accelerating. These convivial conditions will last another year but then the global economy will come off the boil, says Fitch.

“The global economy has improved markedly this year and now looks set to record its strongest expansion since 2010. The advanced economies are benefiting from improving labour markets and supportive macroeconomic policies, while growth in emerging markets (EMs) is returning to a four-year high following a pick-up in China and a demand recovery in many large commodity-producing countries,” Fitch says.

China is increasingly the engine of global growth and investors were unsettled by a slowdown last year, but that seems to be over, at least for now. “The upturn in Chinese import growth from mid-2016 has been an important factor behind the rise in world trade growth to a six-year high of 5%,” Fitch reports.

The buoyant picture should be maintained through 2018, but after that things become more uncertain.

The slowdown in China in the near-term is expected to be relatively modest, while China’s weight in global GDP is rising constantly, adding to its importance to global growth. But Fitch says the bigger risk is a “surge in global trade protectionism and a sharp rise in eurozone fragmentation,” which following the Brexit referendum, and more recently the Catalan secession bid, look like a growing problem.

Russia has been one of the countries that have surprised on the upside as the economic recovery is going better than expected, even compared to its peer group, which are also doing well.

“No less than 15 of the Fitch20 countries saw better-than-expected GDP outturns in 2Q17 and in several cases – including Canada, Russia, Turkey and Poland – the positive surprises were large at over 0.5% (not annualised). Only India, Switzerland and Australia saw disappointments relative to the 2Q17 estimates published in the June 2017 GEO,” Fitch said. The agency has upgraded its global growth forecast to 3.1% in 2017 from 2.9% in June, and 2018 growth has been upgraded to 3.2% from 3.1%.

The Eurozone is also doing very well, growing faster now than at any time since 2007. It seems the global recession is over and the good news is spilling over into all the Central European markets, most of which are booming.

“Eurozone GDP growth is set to reach its fastest rate since 2007 this year at 2.2%. The pick-up in 2017 to date has been led by exports, but the backdrop is an increasingly resilient and broad-based recovery in domestic demand. The steady improvement in the job market is underpinning consumer spending. Employment growth has supported household incomes, and the decline in unemployment is boosting consumer confidence, which has reached its highest levels since mid-2007. This has contributed to a modest decline in the household saving ratio,” says Fitch.

China’s growth has also picked up this year. Real GDP accelerated to 6.9% y/y in H1 2017 from 6.7% in 2016, and nominal GDP picked up to 11.4% from 8.0%. The pick-up reflected a strengthening in housebuilding, industrial production and exports.

But the emerging markets (EMs) in general have been amongst the star performers. The recovery in EM GDP growth to over 5% partly reflects the progress that EM commodity producers have now made in adjusting spending levels.

“The commodity shock in 2015 was a major hit to income levels in commodity-exporting countries and prompted expenditure retrenchment by both the private and public sectors in order to limit the deterioration in financial balances,” says Fitch. But the bottom has passed and now investment and growth have returned, helped along by a recovery in oil prices from a low of about $30 per barrel to around $50 in the third quarter of this year, although prices are now capped by the new supply from US shale producers.

“Brazil and Russia are the key commodity producers among the Fitch20, and both have seen an impressive external adjustment. In Russia’s case, a large current account surplus has been maintained despite the oil price shock, achieved by massive import compression,” says Fitch adding that it expects Russia to grow by 2% in the meantime. No significant structural reforms are expected until after the 2018 presidential election – if then.