Samy Chaar, chief economist at Lombard Odier Private Banking, comments on concerns over global growth
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Two months after the Chinese stock market fell, headlines continue to focus on China and its slowing industrial sector, especially due to slower exports to large emerging commodity producers. However, all is not bleak in China. First, the services sector, which represents a growing part of the economy, is holding up well. In addition, momentum in the property sector is improving as can be seen from rebounding house prices, property and land sales. Finally, we believe that the Chinese economy should re-gain some momentum thanks to the lagged effects of policy support which were recently unveiled. Indeed, funds available for investment from the state budget soared since June after the fiscal measures and further loosening of monetary policy is also expected.
What about emerging markets? Most of them still suffer from falling commodity prices, the Chinese cyclical slowdown and a potential Fed hike by the end of the year. While Asian fundamentals remain supportive and those economies should rebound accordingly once the situation stabilises, Brazil looks increasingly vulnerable with deteriorating fiscal ratios, a falling currency and rising inflation forcing the central bank into a restrictive monetary policy, putting more pressure on an already recessionary situation. Among the main risks we see for Brazil, the most important is political instability. Sustainable economic improvement in Brazil will not be possible without a stronger political landscape. And President Dilma Rousseff is deeply unpopular, not only among the population but also within her own party, making it close to impossible for her to drive any substantial reform.
Looking at the US, despite the fact that the health of the real economy undoubtedly justifies rates above zero, the FOMC decided to keep its interest rate target unchanged, highlighting weak recent developments in overseas economies and financial markets as the main reason. The decision was accompanied by a dovish quarterly update of forecasts, with downgrades for growth and inflation over 2016-2018 as well as the long-run. This development means that the Fed is now data-dependent on both domestic and foreign conditions, making its task considerably more arduous. That said we believe global growth fears – with China at the epicentre of worries – will normalise at some point, as underlined above. And December seems to be now the base-case for the first rate hike.
In Europe, economic and corporate fundamentals remain encouraging. With improving liquidity and credit conditions, higher industrial production, strong consumption and double digit pace earnings growth, the region continues to enjoy the benefits of the economic recovery.
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By GlobalDataSo what does this all mean? Global growth is not falling apart. Rather, we expect the world economy to continue to grow – even if at a moderate pace – with regional divergences. Investors should consider US markets as they are certainly more immune to any further global slowdown while Swiss companies proved resilient to the challenging currency environment. We also maintain our preference for European and Japan markets which benefit from earning recoveries and supportive monetary policies.
Samy Chaar, chief economist at Lombard Odier Private Banking
