A vintage car with its bonnet raised is seen parked at a gas station along the the seafront boulevard "El Malecon" in Havana, Jan. 12, 2015. (Reuters Photo/Alexandre Meneghini)

Global Growth Showing Signs Of Good Health


FEBRUARY 09, 2015

The global growth scare that's gripped financial markets is looking overblown to some economists. Even as bond yields plumb record lows alongside sliding inflation, the world economy is set to strengthen with the US expansion plowing ahead and cheaper oil, cash and currencies providing lift elsewhere.

Signs of a healthier outlook -- bolstered by central banks rushing to ease monetary policy to prop up prices -- would comfort investors and Group of 20 finance chiefs meeting Monday in Istanbul, even amid the distractions of Greece and Russia.

Bank of America is predicting stocks will outperform bonds this year as reflation takes hold.

"G-20 policy makers are concerned inflation won't turn around, but what's in the pipeline does look more promising in terms of the growth and inflation outlook," said Torsten Slok, chief international economist at Deutsche Bank in New York and a former International Monetary Fund forecaster.

Slok estimates the world economy will grow 3.6 percent this year, the fastest pace since 2011 and a bit quicker than the 3.5 percent envisaged by the IMF last month when it cut its outlook by the most in three years.

At hedge fund SLJ Macro Partners in London, co-founder Stephen Jen is among those betting on a "converge up" scenario in which a resurgent United States buoys expansions internationally.

G-20 agenda

The global economy heads the agenda at the Istanbul meetings for G-20 officials. Finance ministers and central-bank governors will discuss it at a dinner on Monday, and it was the first item in five sessions of talks by their deputies on Sunday, before they started work on drafting the official G-20 communique.

That gathering follows a high note at the end of last week. US employers have taken on a million new workers since November, the biggest three-month increase in payrolls in 17 years, data released Friday by the Labor Department showed. Wages rose, with average hourly earnings jumping 0.5 percent in January, the biggest monthly gain since November 2008.

"Three cheers for the US labor market," Scott Anderson, chief economist at Bank of the West in San Francisco, said on Friday.

The jobs data "should ease fears" the United States will be dragged down by weak growth elsewhere, he said.

Russia risk

Even so, those fears aren't baseless. The euro area's fragile recovery is clouded by trade-disrupting sanctions against President Vladimir Putin's Russia, and by the risk that Greece is on the edge of a financial crisis that will force it out of the currency bloc. Chinese Vice Minister Zhu Guangyao said in Istanbul on Sunday that a Greek exit would be a "serious issue."

HSBC chief economist Stephen King is concerned cheaper oil may reflect worldwide deflationary trends, and that slumps in China, Brazil and Russia mean emerging markets are no longer reliable drivers of expansion.

"My biggest concern is not Greece, but Russia," said Erik Nielsen, chief global economist at Unicredit Bank in London.

"I don't know here it'll go from here but Putin's mysterious game plan must rank as the single biggest risk to European, and thereby also global, growth."

A more bullish scenario envisaged by JPMorgan Chase economists is a "good rotation" in which the euro-area and Japanese economies accelerate toward a 2 percent growth rate, narrowing the gap with the United States, which they see expanding 3.2 percent this year.

Central-bank action

Oil, at about half the price it was last June, should contribute by boosting the spending power of companies and households.

Crude between $60 and $70 a barrel could add 0.5 percent to global gross domestic product this year and next, according to Capital Economics in London.

Meantime, multiple central banks have eased policy to combat deteriorating inflation. Of the G-20 central banks, those in Canada, India, Australia, Turkey and Russia all cut benchmark rates since the start of 2015 and the European Central Bank announced a 1.14 trillion-euro ($1.29 trillion) package of asset purchases.

China last week reduced the amount of cash lenders must hoard as reserves.

Bank of America chief investment strategist Michael Hartnett predicts "victory" for central banks after they cut rates 542 times and boosted the amount of assets they hold to $22.5 trillion since the 2008 collapse of Lehman Brothers. That should spur gains in stocks, bond yields and the dollar, he said in a Feb. 4 report.

Weaker currencies

As for the real economy, laxer monetary policies have led to weaker exchange rates versus the dollar that help make exporters in many countries more competitive. In the euro area, for example, the single currency has fallen about 11 percent on a trade-weighted basis over the last year.

Deutsche Bank's Slok reckons that lower oil, euro and yields combined should add 1.75 percent to European GDP over the first year. While the United States faces a rising dollar, its economy should still get a boost of 1 percent from oil and bonds.

And it's not just economists turning more upbeat.

"For the first time in five years, I'm actually a little more bullish on where the global economy is going than economic forecasters," said Dave Cote, chief executive officer of Honeywell International, the Morris Township, New Jersey- based company operating in industries from aerospace to energy.

Signs are materializing that other economies are improving in America's wake. Jen at SLJ says the United States has almost always led the rest of the world in upswings.

European hiring

Even companies in the euro area are stepping up hiring by the most since the middle of 2011 as manufacturing and services activity from Germany to Spain accelerates.

Retail sales advanced at their fastest annual rate since 2007 in December, while factory orders surged in Germany.

Economists at ABN Amro Bank last week revised their forecasts up to show growth of 1.6 percent this year and 2.2 percent in 2016.

"Momentum is starting to build," said Nick Kounis, head of macro and financial markets research at ABN Amro in Amsterdam. "The commentary that you see everywhere is remarkably downbeat. There will be some pleasant surprises."

For some economists, the US consumer is key. US households are benefiting from a strengthening jobs market and lower gasoline prices. As a percentage of disposable income, household net worth is around its highest level since the end of 2007, according to data from the Federal Reserve.

US imports

"The US is again the engine of global growth," said Allen Sinai, chief executive of Decision Economics in New York. "The fundamentals around the consumer remain extremely positive so consumer spending should carry the day."

That's good news for the rest of the world. At $11.5 trillion in 2013, US personal-consumption expenditures were larger than the GDP of any other country that year, including China, IMF statistics show. US imports increased 2.2 percent to a record $241.4 billion in December, the Commerce Department said last week.

As for Asia, economies there are also showing signs of firming. Japan is limping out of last year's stinging recession as unemployment falls to the lowest level since August 1997.

Barclays economists see "upside risks" to their 2015 Asia-Pacific economic-growth forecast of 5.5 percent because of the fall in oil prices, which Australia & New Zealand Banking estimates could add half to three-quarters of a percentage point to regional growth.

In India, which imports about 80 percent of its oil, falling prices are a blessing, too. They may also offer some ballast to China and enable a further easing of monetary policy there, according to Kenneth Courtis, former Asia vice chairman at Goldman Sachs.

"It's a once-in-a-generation gift," said Glenn Maguire, ANZ's Singapore-based chief economist for Asia Pacific.

That may be enough for the G-20's finance ministers and central bankers to express cautious optimism in Istanbul that the United States isn't on its own.

"While we must lead by example, we cannot do it alone," Treasury secretary Jacob J. Lew said last week.