A Long Summer’s Night – Economic Update

A Decoupling Story

Economists are a disputatious bunch. Permanently prepared to defend an economic view and perpetually armed with the “analytical minutia” necessary to support that particular view. However, set amidst such fervent economic contention, exists an unlikely economic consensus. One that helps us rationalise the decade-long economic estrangement that has emerged from the Global Financial Crises (GFC). Some have termed it –   a decoupling;   others – a disunion;   while others again – a separation. Irrespective of how history will remember it, the GFC forged an economic divide that will continue to shape global growth for many decades to come.

At its extremity, having experienced the maelstrom of the collapse and still frail from the fall, each economy would eventually discover the remoteness of its own economic solitude. Initially, containment was the order of the day.  And that containment came in the form of a coordinated interest rate cut by central banks. Yet from there, government responses eventually diverged. Each economy – situated at its own unique starting point and shackled to both its own national affairs and its wider regional influences – would inevitably realise, that any path towards an economic recovery would need to be self-constructed.

And so, the “fragmented growth” that we are currently experiencing, might be owed (partially at least) to the inappreciably different economic seeds that were sowed in the aberrantly cold economic topsoil, generated by the GFC.

The US

Currently, the US is the engine room of global economic growth. And this growth has been underpinned by large fiscal deficits in the form of tax cuts and stimulus. However, it is widely viewed that such economic measures are unsustainable in the long term. Furthermore, the ill-timed implementation of such expenditure has cultivated inflationary pressures upon U.S. interest rates. Hence, the Federal Reserve continues to closely monitor CPI levels, as well as further rises in borrowing costs. These rises appear closely related to market expectations of when “The Fed” might terminate its hiking cycle. Also threatening to depress growth are protectionist measures in the form of tariffs and trade wars and the continuation of further administrative dysfunction, including the possibility of further political change during the November midterm elections. However, despite the fact that the economic metrics remain strong, there is growing sentiment that we may be approaching “a peak moment” within the U.S. economy.

Europe

Conversely, European growth continues to occur at a comparatively slower speed to that of the U.S. economy. Plagued by both Brexit negotiations and reductions in the asset purchase program, Central Europe is expected to maintain its current accommodative stance by keeping key interest rates at their current levels. This is despite the fact that relative borrowing rates between Central Europe and the U.S. continue to diverge. While an orderly Brexit is anticipated to occur on the 29th March 2019, the possibility of uncertainty hinges upon the ability of the negotiating parties to overcome any policy differences, an outcome which has so far proved elusive. Regarding asset purchases, the formal asset purchase program is expected to end in December 2018 as the region continues to enjoy improving liquidity conditions. Growth is therefore expected to continue at a modest pace in 2019, notwithstanding any unforeseeable disruptions to open trade and multilateral cooperation.

Emerging Markets

Intriguingly, Emerging Markets continue to supply the global economy, with newly harvested forms of economic growth. As “consuming classes” continue to rise in all corners of the globe, established markets are increasingly turning to these fertile grounds, as the underwriter of longer term outperformance. Central to this expansion has been the Chinese economy. Fuelled by supply-driven growth, and underpinned by public borrowing and government spending, China has propelled itself towards urbanisation, harnessing the output of traditional industries such as – manufacturing, servicing, infrastructure and agriculture. Despite the fact that GDP growth continues to slowly recede, China will continue its pathway towards a demand-driven consumption based model, with rises in average income and household debt likely to further support this transformation.

Elsewhere in emerging markets, we have seen mixed growth. In developing Asia (broadly speaking) growth has continued its upward trend. In developing Europe (again, broadly speaking), growth continues to abate. The MSCI Emerging Markets Index has receded approximately 8 percent since January 2018. Overall, emerging markets continue to be influenced by rising U.S. interest rates, a rising U.S. dollar, local currency devaluations, commodity price fluctuations and rising debt levels.

And so, as the decennial of the GFC approaches, and the economic recovery which succeeded it nears its final stages, economic disagreement once again rages, this time over just when (and how) the “long summer’s night” shall end.


The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Lanyon Partners cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.