Global Economy, Politics, Rates & FX

Forecast “[…] a weaker Krone will, albeit with a lag, feed through to higher imported and headline inflation and boost the competitiveness and exports of the non-oil sector. The long Krone trade, which has seemingly fallen out of favour, may once again get a look-in later in 2018” [Bond market bang, major currency whimper, 21 December 2017]

Outcome Norwegian headline CPI-inflation rose to a 10-month high of 2.2% yoy in February while growth in the NOK-value of mainland exports remained near multi-year highs. The Krone was the best performing major currency in Q1 2018, with the NEER appreciating about 5%.

Forecast “Financial markets, at present, expect only very marginal policy tightening by developed central banks […]. This skinny market pricing of policy rate hikes is appropriate, in my view. At a global level, there are signs that GDP growth may have plateaued in Q2 2017 at around 3.1-3.2% year-on-year […]. Inflationary pressures remain muted in developed economies […]. Moreover, in the US and Australia positive employment growth and very low unemployment rates continue to go hand in hand with only modest growth in real wages, while in the UK real wages are falling.” [Central banks – A muted second inflexion point, 14 July 2017]

Outcome Two, five and ten-year government bond yields in the following 6 weeks fell by on average 2bp in Australia, 7bp in Japan, 13bp in the US, 21bp in Germany and 22bp in the UK.

Forecast “The focus on headline employment and unemployment figures masks a number of underlying weaknesses in these labour markets [US, UK, eurozone and Australia]. These include: A rise in the number of unemployed leaving the labour force; The still modest share of those employed full-time and falling working hours; and Still large pools of available labour depressing nominal wage growth […]. As a result, I would expect monetary policy in major economies to remain accommodative near-term and to be only very slowly tightened in the US, with governments increasingly turning to fiscally expansive policies to try and boost growth and wages.” [The common theme of low-wage growth, 10 February 2017]

Outcome In US, pool of available labour is still 7.1 million higher than in early 2000. Growth in aggregate weekly payrolls in private sector (in real terms) slowed to 1.5% yoy in January-April 2017 from 2.5% yoy in the previous 6 months. In UK, pool of available labour had fallen only marginally by February 2017 to 12.16 million and was still 1.3 million higher than in late-2004. Real weekly earnings fell 1.5% from November 2016 to February 2017 and rose only 0.6% yoy, the slowest pace of growth since October 2014. In Australia, pool of unemployed and part-time workers rose in January 2017 to all-time high of 4.59 million or 23.3% of working age population (ABS data out 16 February). The Bank of England and Reserve Bank of Australia have kept policy rates at record lows and the British government is under pressure to boost public sector wages and end fiscal “austerity” measures. The Fed had by July only hiked rates once in 2017 and President Trump’s promised fiscal stimulus package of tax cuts and infrastructural spending is a key policy pledge.

Forecast Developed central banks may refrain from loosening monetary policy further near-term, with the exception of the RBNZ and possibly ECB. At the very least, policy-makers will tweak a discourse which has largely focused on doing “whatever it takes […]. Moreover, strong country PMI data for October, including in China (highest level since July 2014), Russia (4-year high) and India (22-month high), provide an early sign that global GDP growth picked up further in early Q4.” [Be careful what you wish for, 1 November 2016]

Outcome RBNZ cut its policy rate 25bp on 9 November 2016 and ECB on 8 December 2016 extended its QE program by nine months through to end-2017. No other developed central bank has since cut its policy rate. Global GDP growth rose to about 3.0% yoy in Q4 2016 from 2.8% yoy in Q3 2016.

Forecast “My core view is that […] major central banks […] may refrain from loosening monetary policy further near-term. I would certainly expect central bank policy rate cuts to become increasingly less frequent than in the past and the ECB and BoE to keep the modalities of their current QE programs broadly unchanged for now. […] To be clear, the risk near-term remains biased towards more central bank monetary policy easing. Bar the Fed and possibly a handful of EM central banks still fighting weak currencies and high inflation, no major central bank is likely to hike policy rates or tighten monetary policy this year, in my view […]. In this context higher volatility is likely to prevail and global risk appetite may struggle to forcefully regain traction for now.” [Global central banks nearing important inflexion point, 16 September 2016]

Outcome This theme gained traction in subsequent weeks and became prominent after Trump’s election victory and subsequent rise in global yields and expected inflation. Amongst developed central banks, only the RBNZ has since cut rates (but moved to a neutral outlook). The Fed hiked rates 25bp in December 2016 and amongst major EM central banks Mexico and Turkey hiked rates in Q4 2016 in the face of weakening currencies. Global equities were broadly flat in the following 8 weeks.

Forecast The UK referendum on EU accession has the potential to be far more destabilising to financial markets than the BoJ’s policy meeting on 16 June and in particular the Fed’s meeting the day before. While UK markets would likely feel the brunt of a decision to leave the EU, the euro would also likely weaken and global equity markets conceivably sell off.” [It’s oh so quiet…for now, 14 June 2016]

Outcome In the two sessions following UK referendum Sterling NEER depreciated 9% and global equities weakened 6.6%.

Forecast “Global headline inflation in developed economies is unlikely to rise much but core consumer prices will again avoid deflation […].Structural themes – Nationalism to gain further traction, relationship between central banks to deteriorate further.” [What to expect in 2016 – same, same but worst, 19 January 2016]

Outcome Year-on-year headline CPI-inflation in developed economies inched up to about 1.8% in December 2016 from 1.6% in December 2015. Core CPI-inflation fell incrementally to about 1.9% from 2.2%, with deflation again avoided.
Numerous terrorist attacks, an immigration crisis and weak economic growth accelerated the rise of nationalist and populist parties in Europe, including the National Front in France, the Party for Freedom in the Netherlands and Five Star Movement in Italy, and contributed to the UK’s decision to leave the EU. US President Trump espoused nationalist policies, both during his presidential campaign and following his inauguration. Tensions between central banks and governments, including in the US, UK and eurozone rose markedly in 2016, spilling into overt criticism about the optimal paths for monetary and fiscal policies.

Forecast “But talk of global recession let alone economic collapse is somewhat overdone […]. Growth around 2.5-3.0% may well be the new normal, rather than the long-term average of 3.5% let alone the heady 4-6% growth occasionally recorded in the late 1990s and mid-2000s.” [Global growth – down but not out, 13 October 2015]

Outcome Year-on-year global GDP growth slowed gradually from 3.2% in Q4 2014 to 2.8% in Q1 2016 but stabilised in Q2-Q3 2016 and rose to about 3.1% in Q4 2016 – a long way from recessionary territory (2%) let alone from the 1.2% contraction recorded in H1 2009.

Forecast “My core scenario is for the Fed, Bank of England and ECB to do little to monetary policy in the next couple of months bar tweak their language. Central banks of economies exposed to China and commodities such as the Reserve Bank of Australia, the Reserve Bank of New Zealand and the Bank of Canada may well delivery another rate cut. Similarly, I expect emerging market central banks to look for opportunities to cut policy rates, particularly if the Fed is not going to hike its policy rate until December.” [Deflation, what deflation?, 25 September 2015]

Outcome BoE left policy rates unchanged until August 2016, Fed hiked only in December 2015 and ECB cuts its deposit rate 10bp in December 2015 but left refinancing rate unchanged until March 2016. RBNZ cut 25bp in December 2015 and RBA cut 25bp in May 2016. Norges Bank also cut its policy rate 20bp in October 2015 in the face of lower oil prices. The following EM central banks cut their policy rates: RBI 50bp (29 September 2015), PBoC 25bp (October 2015), Central Bank of Nigeria (November 2015), CBC 12.5bp (December 2015) and BI 25bp (January, February and March 2016).

Forecast “The benefits of the oil-price fall to most countries’ economic growth should not be over-stated as it is no panacea to structural and cyclical deficiencies at a global level.” [Crude expectations, 16 January 2015]

Outcome Global GDP growth continued to weaken throughout 2015, albeit at a gradual pace.

Forecast “If markets are wrong to assess growth as weak and downgrade equities, they may eventually re-price the growth outlook and equities higher […]. Markets should be concerned about the underpinnings of growth in the eurozone and Japan and certainly Russia (and more generally the oil exporters) but less so about the US and somewhat more comfortable about the rest of Asia.” [The global growth story – cause for concern, not panic, 17 December 2014]

Outcome Global equities rallied 6% in the following two months. In 2015, GDP rose only 0.2% in Japan and contracted 3.7% in Russia (worst for 6 years). Eurozone growth rebounded to only 1.5%, after two years of negative growth, and trailed growth in US (2.4%) and UK (2.2%).