Global Outlook Improving

Market and Economic Update –  Week Ending 20th April 2018

Peter Flannery CFP AFA

 

 

“If you have one economist on your team,
it’s likely that you have one more than you’ll need.” 

Warren Buffett

Note the sharp uptick in world trade volumes to the right of the chart above.

  • The global economy grew by 3.8% in 2017 which is the fastest growth since 2011. According to recent updates from the International Monetary Fund (IMF) conditions around the world remain generally supportive and they expect growth to improve slightly to a rate of 3.9% over 2018 and 2019.

 

Manufacturing and consumer confidence continue to strengthen.

  • In simple terms, spending on capital items has been quite strong meaning that businesses have been a bit happier to spend money on infrastructure, plant and equipment etc in order to grow their businesses. Also an improved outlook generally along with accommodative monetary policy (e.g. low interest rates) along with some pent up demand for capital goods has helped to drive that spending.  Investment spending remember has remained quite weak since the Global Financial Crisis over 2008 / 2009 and is in some ways in recovery mode.

 

  • Although trade tariffs and trade sanctions have been making the headlines of late, at the same time they have yet to have a major impact whilst global trade continues to strengthen.

 

  Is inflation finally happening in Europe?

  • The European economy has stabilised and continues to grow although at a slow pace. Inflation of any real measure has been absent but has started to emerge which the European Central Bank will be pleased about.  Interestingly, Germany is the key economy in the Euro area and I noticed their government employees received a pay rise of 7.5% over 2½ years.  This may help to support inflation in the future in the Euro area.

 

  • A stable European economy will help support global growth. Whilst unexpected events can upset the markets, Europe is trailing the US in terms of economic recovery but appears to be on track.  Good for Europe… good for China ( a major trading partner) and good for the global economy.

 

The above chart shows a reasonable bounce back in the global dairy trading price.

  • After several weeks of declining prices, the dairy trade price bounced back again this week with the average price sitting at $US3,587. In theory this means a profitable price for New Zealand dairy farmers generally.  It appears that there is little likelihood of much in the way of any pay out forecasts being adjusted as a result of this recent auction.

 

  • In other news, China still likes foreign reserves in US Treasuries. Recent data shows that they increased their holdings in February by $8.5 billion.  That looks like the biggest purchase in six months or so.  Interestingly, this amounts to around USD$1.18 trillion which is 18.7% of all foreign holdings and about 6% of all US Federal debt.

 

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