World economy on track for modest recovery, inflation to remain well contained

Schroders Economic & Strategy Viewpoint says the world economy is on track for modest recovery as monetary stimulus feeds through and fiscal headwinds fade in 2014. Nonetheless, it is not good news for the rest of the world particularly those economies which have relied on selling to the US, it says. It says the US economy still faces fiscal headwind, but gradually normalising as banks return to health and private sector de-leverages. The Federal Reserve is expected to complete tapering of asset purchases by October 2014, possibly earlier, with the first rate rise expected in the third quarter of 2015.

“The emerging markets are vulnerable in this respect and it is notable that the surplus in these economies has declined significantly from 5% to 1% of gross domestic value (GDP) since the crisis according to figures from the IMF,” it says. Schroders notes that much of the improvement in US trade has been with the fragile five of Brazil, India, Turkey, Indonesia and South Africa. “These economies are now adjusting, but this analysis suggests that there will be no return to pre-2007 export growth,” it says. It adds that tighter monetary policy also weighs on emerging economies. It says that China’s growth is downshifting as past tailwinds on strong external demand, weak US dollar and falling global rates going into reverse. “The authorities seek to de-leverage the economy,” it says.
The Chinese GDP growth slowed in the first quarter of 2014, from 7.7% at the end of last year to 7.4%, year on year. “Though this was better than expected – City expectations had been for a rate of 7.3% - the economy is still slowing and we think hopes for greater stimulus will be dashed.

“Meanwhile, higher frequency data for March, combined to give a leading indicator, generally points to continued softness in the second quarter,” it says. Combined with the weaker PMI seen at the month’s start and softer money supply numbers, Schroders opines that it is difficult to feel positive about Chinese growth, despite the better than expected GDP number. Pulling this together the conclusion is that the US is likely to be less of a locomotive for global growth than it has been in previous cycles, it says. “Consumer spending is likely to be more lacklustre and, of the demand generated by the US, more is likely to be met by domestic rather than overseas production,” Schroders adds.