Global economy is in fairly good shape – Danske Bank

Chief Analyst, Arne Lohmann Rasmussen a Danske Bank, argues that the global economy is still in fairly good shape, although it is starting to lose some tailwind as witnessed by a moderate decline in business confidence in the US, China and Japan in the early spring months.

Key Quotes

“In particular, we are concerned that massive stimulus in China in 2016 has turned into policy tightening to rein in runaway house prices and rising financial leverage.”

“The euro area is bucking the trend currently when it comes to business confidence, as the manufacturing PMI has continued to rise. However, we do not expect the euro area to be able to decouple from the overall global cycle, and export and investment activity is likely to dampen when the slowdown in China starts to feed into foreign sales.”

“While we have not been very optimistic on the scope for US fiscal easing, even our moderate expectations will likely not be met. We have therefore removed our projection of a boost from US tax cuts and infrastructure spending from the forecast, resulting in a downward revision to US growth to 1.9% in 2018 from 2.8% previously. So we look for more of the same for the US economy: a cruising speed recovery with a further reduction of slack and gradual Fed hikes.”

“As the Fed is also expected to start dipping its toes in and reduce its balance sheet, we now only look for three rate hikes by the Fed next year (instead of four). US private consumption will continue to be underpinned by decent wealth gains from rising house prices and continued employment growth. Investments should also continue their recent moderate growth as profit gains are decent and financing costs remain low due to the low bond yields and high valuation of the stock market.”