Global growth quickens on US expansion

The world economy is set to strengthen with the US expansion plowing ahead. Photo / AFP

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 on 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 AG in New York and a former International Monetary Fund forecaster.

Slok estimates the world economy will grow 3.6 per cent this year, the fastest pace since 2011 and a bit quicker than the 3.5 per cent envisaged by the IMF last month when it cut its outlook by the most in three years. At hedge fund SLJ Macro Partners LLP in London, co-founder Stephen Jen is among those betting on a "converge up" scenario in which a resurgent US buoys expansions internationally.

Three cheers for the US labour market.

Scott Anderson, chief economist at Bank of the West

The global economy heads the agenda at the Istanbul meetings. G-20 officials plan to "welcome the ongoing favourable outlook for growth and employment in some key economies," while noting expansion is uneven and slow in places such as the euro-area and Japan, according to a draft communique obtained by Bloomberg News.

The 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 per cent in January, the biggest monthly gain since November 2008.

"Three cheers for the US labour market," Scott Anderson, chief economist at Bank of the West in San Francisco, said in a February 6 note. The jobs data "should ease fears" the US will be dragged down by weak growth elsewhere, he said.

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. Canadian Finance Minister Joe Oliver said in an interview in Istanbul on Monday that the Greek "situation is very serious."

HSBC Holdings Plc 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," Erik Nielsen, chief global economist at UniCredit Bank AG in London, said in a note on Sunday. "I don't know where 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 & Co economists is a "good rotation" in which the euro-area and Japanese economies accelerate toward a 2 per cent growth rate, narrowing the gap with the US, which they see expanding 3.2 per cent this year.

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 per cent to global gross domestic product this year and next, according to Capital Economics in London.

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

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 Holdings. That should spur gains in stocks, bond yields and the dollar, he said in a February 4 report.

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 per cent 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 per cent to European GDP over the first year. While the US faces a rising dollar, its economy should still get a boost of 1 per cent 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 materialising that other economies are improving in America's wake. Jen at SLJ says the US has almost always led the rest of the world in upswings.

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 NV last week revised their forecasts up to show growth of 1.6 per cent this year and 2.2 per cent 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."

The US is again the engine of global growth.

Allen Sinai, chief executive officer of Decision Economics

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.

"The US is again the engine of global growth," said Allen Sinai, chief executive officer 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 per cent 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 recession as unemployment falls to the lowest level since August 1997.

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

In India, which imports about 80 per cent 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 Group.

"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 US isn't on its own.

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

- Bloomberg