Dynamic global trade and improved labor markets, coupled with fiscal stimulus and accommodative monetary policies in key countries, are ...

Global Outlook Improves

Dynamic global trade and improved labor markets, coupled with fiscal stimulus and accommodative monetary policies in key countries, are prompting the global economy to consolidate its healthy growth trajectory. A comprehensive estimate for the global economy corroborates that GDP expanded 3.1% annually in Q2, matching the result in Q1 and in line with what our Consensus Forecast had expected last month. Economic momentum is expected to continue in Q3, with the global economy forecast to expand 3.1% again.

Economic activity improved in most of the advanced economies in Q2, with the Euro area leading the pack. The euro bloc’s economy expanded at the fastest pace in over six years on the back of robust domestic demand. The Euro area’s strong recent economic performance is largely due to a declining unemployment rate, along with the European Central Bank’s (ECB) monetary stimulus program. Against this backdrop, analysts are now betting on the timing of monetary policy normalization in the Euro area. While economic data for Q3 corroborates that the Euro area’s economy is in good shape and that the ECB could start tapering its qualitative easing (QE) sooner rather than later, inflation remains below the ECB’s target of “below but close to 2%”, adding uncertainty about the Bank’s next step. In the United States, the economy also gathered steam in Q2 following Q1’s disappointing result. As in other advanced economies, domestic demand led the acceleration due to a healthy job market and strengthening confidence about the economic recovery.

Elsewhere, Japan’s domestic economy propelled growth in Q2 to levels last seen over two years ago. Resilient household consumption raised hopes that Japan may have entered a more sustainable growth trajectory. In the UK, uncertainty about the future of the economy, together with eroded wages due to higher inflation, led the economy to slow in Q2. Among the key emerging market economies, China’s economy continued to show strong resilience in Q2, while the economic recovery in Russia continued to gather pace, with GDP expanding at the fastest pace in nearly five years. While analysts were hoping that this year’s long-awaited Jackson Hole Economic Policy Symposium would deliver some clues to the future of monetary policy in the Euro area, the gathering proved to be disappointing in that respect, as ECB President Mario Draghi did not unveil details about the ECB’s approach to cutting back its asset purchase program. In the same vein as her colleague in Europe, Federal Reserve Chair Janet Yellen did not provide forward guidance on future monetary policy moves by the Federal Reserve, in a context of low unemployment, rising asset prices and a stubbornly low inflation rate. Instead, she praised the financial regulations put in place since the global financial crisis to limit financial risks. Yellen’s speech has been seen as a critique of President Donald Trump and his stated intention to roll back certain post-crisis reforms. Yellen’s term expires in February, and Trump has not stated whether he will reappoint her.


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