by Kristina Hooper, Global Market Strategist, Invesco Ltd., Invesco Canada
More signs emerged last week that we are in the throes of a synchronized global economic recovery, with emerging markets and developed markets seeing improved economic growth. As the Trump administration works to pass its tax reform package, I expect the debate over economic stimulus to accelerate. Is it still needed in a growing economy?
Growth is picking up around the world
In emerging markets, a number of countries are seeing improved growth expectations. The Organization for Economic Cooperation and Development (OECD) revised its expectations for growth in China up to 6.8% for 2017. Russia is benefiting from greater demand for oil, while Brazil is benefiting from monetary policy easing. India is a longer-term story, as it is poised to experience improved growth after reforms such as de-monetization and the implementation of a goods and services tax. As mentioned in The Economist last week, 21 countries in the MSCI Emerging Markets Index have already reported second-quarter gross domestic product GDP growth — and all of them experienced improvement over the first quarter.
Developed markets are also participating in the improved growth environment. The OECD has projected that the euro area will grow by 2.1% in 2017, which is up from previous estimates. The same is true for Japan and Canada; the OECD growth estimate for Japan for 2017 was revised slightly upward to 1.6%, and the growth estimate for Canada for 2017 was revised up significantly to 3.2%. Even Greece is experiencing solid growth at a level not seen since 2008. In fact, global GDP growth was revised slightly upward in September by the OECD. It is now projected to rise to approximately 3.5% in 2017 and 3.7% in 2018. The OECD Interim Economic Outlook explained, “The upturn has become more synchronized across countries.” And this momentum is likely to continue given positive sentiment as seen in purchasing managers’ surveys.
This global growth recovery is helping US companies that have exposure to international business. According to FactSet Research Systems, companies that derive more than 50% of sales from outside the US are expected to have an earnings growth rate of 7.9% in the third quarter, while companies that derive less than 50% of sales from outside the US are expected to experience a slight earnings decline (specifically, -0.1%) in the third quarter.1 This is a result of improved global growth as well as a weaker US dollar.
Protectionism could threaten global growth
So what can derail this growth train? The biggest threat is arguably protectionism, which is often an outgrowth of nationalism and even regionalism. We have seen this phenomenon grow in spades in the past year. It made a big splash with the Brexit vote and has not abated since. Economic nationalism helped deliver the US presidency to Donald Trump, while regionalism enabled Catalonia to prevail in its independence vote from Spain last week.
Not only can movements like Catalonia’s create instability and uncertainty — the 10-year Spanish bond rose from 1.59% on Sept. 29 to 1.76% by Oct. 4 — but they can also result in barriers to free trade.2 Therefore, we will want to follow developments on this front closely since there could be more nationalism/regionalism on the horizon with secessionist movements active in Scotland, the Kurdish region of Iraq, Flanders, Quebec, and the Basque region of Spain.