Economic Outlook: October

The main drivers behind the improved global situation are the economic recoveries in the eurozone and some emerging markets. This has pushed deflation risks into the background. Even so, inflation remains subdued. Major central banks will be able to tone down the ultra-expansionary policies of recent years, but genuine monetary tightness remains a distant prospect.

USA: The US economy has so far failed to meet investors’ expectations this year. Personal consumption is not picking up as well as the buoyant labour market would justify. At the same time Donald Trump’s proposed reforms are on ice. Nevertheless, having pulled itself out of the crisis, the world’s biggest economy still has the potential to achieve faster growth rates. The Fed will stick to its policy of implementing moderate interest rate hikes and be careful to avoid causing major shocks.

Eurozone: The eurozone economy is doing well at present. The employment situation is improving in several countries, though admittedly from a weak level. However, structural differences between individual economies are still a fundamental problem. The ECB‘s low-interest-rate policy has papered over the weaknesses, but action is now required at the political level. Hopes are pinned on France‘s President Macron. Labour market reforms in the eurozone‘s second largest economy could have a positive follow-on effect in other countries.

Germany: Germany’s economic growth is broadening. In previous quarters expansion had been driven mainly by personal consumption, but now capital spending and exports are gaining momentum. There are growing hopes of a self-sustaining upswing. Companies are looking to the future with renewed optimism and increasing their investment activity again. Interest rates are low, and the eurozone now looks in better shape economically. Many business leaders are therefore putting money into upgrading plant and equipment. This benefits other companies, whose improved order books mean more jobs.

Switzerland: Swiss GDP rose by 0.3% in the second quarter compared with Q1. This is a disappointing outturn, especially as it was accompanied by a downward revision of the Q1 result. Growth in the first half-year was thus relatively modest. Important leading indicators had fuelled hopes of a positive surprise in the second quarter, but that has not happened. Hopes are now pinned on the second half-year. The depreciation of the Swiss franc and brisk economic activity in the eurozone suggest that the Swiss economy should gather momentum. This prospect is supported by very optimistic responses to purchasing manager surveys.

Emerging markets: The 2015 commodity price collapse dealt a painful blow to economic growth in commodity-exporting countries in the emerging world. Two of the major emerging nations, Russia and Brazil, were plunged into recession. Commodity prices have since stabilised, enabling Russia and Brazil to return to positive growth. Nevertheless, raw material prices are still well below their old highs. With the commodity markets providing no new momentum, Russia and Brazil will not be able to return to the high growth rates chalked up during the commodities boom.

China’s economy has recently recovered somewhat, but the stabilisation is on shaky foundations. The surge in real estate prices, which has had an invigorating effect beyond the building industry, is now losing steam. Moreover, debt-ridden state enterprises will not be able to sustain the politically inspired investment offensive over the long term. Thus the trend towards decelerating growth rates, observable since 2007, looks set to continue. Given the sheer size of the Chinese economy, that is bound to have an impact throughout Asia.