Synchronised global recovery continues - HSBC

According to analysts at HSBC, the synchronised global recovery continues as growth continued to surprise on the upside in the likes of China, Japan and the eurozone in Q2, consensus forecasts for most regions of the world are still rising and the latest PMIs paint a picture of renewed acceleration.

Key Quotes

“The major puzzles of dismal productivity growth and persistently weak wage growth, despite historically low unemployment, continue. But with global financial conditions still loose, financial markets are buoyant, particularly in EM where the lure of higher returns continues to suck large capital inflows into FX, equities and bonds – both domestic and foreign. More evidence that inflation is remaining undesirably low – irrespective of the synchronised global growth and asset price gains – is fuelling expectations that the world’s major central banks will keep erring on the side of caution.” 

“For central banks which have spent much of the post-crisis period trying to avert deflation, synchronised growth provides welcome relief. But in many ways the challenges are about to get bigger. There is still huge uncertainty about the appropriate policy setting to deliver and maintain stable inflation. The other increasingly pressing challenge for central banks is that the balance of risks between 1) meeting inflation targets in the medium term and 2) maintaining financial and macroeconomic stability over the long term, may be starting to shift.” 

“To assess the appropriate policy setting, central banks want to know where the economy is relative to potential: whether demand is likely to grow more quickly than supply and push up inflation. But not just in the domestic economy. What is happening on the global stage is just as important. In developed economies growth in the capital stock is weak, productivity poor and debt still high but not all on the supply side is bad. Technological progress and more flexible labour markets have allowed more workers to enter the labour market without pushing up inflation. Moreover, globally, the working-age labour force is still expanding, thanks to emerging economies’ growing populations.” 

“Demand has also been accelerating, particularly in China, though the strongest acceleration is coming through in the eurozone. Only time will tell how resilient global demand will remain as the expansionary fiscal and monetary policy which led the upturn starts to fade.”