Global growth: A delicate balance - HSBC

Tackling the growing tensions between undesirably low inflation and rising financial stability risks will demand a delicate balancing act by central banks and a more nuanced approach to inflation targeting if the global expansion is to be sustained, suggests the research team at HSBC.

Key Quotes

“The synchronised global recovery which began in early 2016 not only continued over the summer months, if anything it showed signs of gaining momentum. GDP growth in Q2 again surprised on the upside in the likes of China, Japan and the Eurozone, Asian export growth was much stronger than expected and the latest PMIs painted a picture of renewed acceleration. The overall pace of global growth at 3.1% y-o-y (nominal GDP weights) in Q2 may seem rather unspectacular relative to the exuberance of global financial markets but there is also much less variations in growth rates between countries than in the recent past: now that Latin America has finally emerged from recession, the first half of 2017 saw the lowest dispersion in growth rates between countries and regions for more than two years, adding to the perception that the global economy is now firing on all cylinders.”  

“Plenty of major puzzles such as dismal productivity growth and persistently weak wage growth, despite historically low unemployment, remain unsolved. But with global financial conditions still loose, financial markets are inevitably buoyant, particularly in EM where the lure of higher returns continues to suck in large capital inflows into FX, equities and bonds – both domestic and foreign. More evidence that inflation is undershooting central banks’ inflation objectives, irrespective of the synchronised global growth, continues to fuel expectations that the world’s major central banks will still err on the side of caution, fearful that there is little scope for easing should the economy turn down. But as the post-crisis expansion continues, the risks of extrapolating recent trends are growing. Recall that global growth was very synchronised in 2006 and 1H 2007, just before the global financial crisis.”