The global economy is in good shape and the CIO believes areas of weakness are not a cause for immediate concern. The CIO remains confident in the global recovery, writes Mark Haefele.
Optimism about the outlook for the global economy has been relatively high. This confidence can best be seen in payroll data; joblessness has fallen in Europe, is at a record low in the UK, and near a 16-year low in the US. Still, the expansion has been consistent rather than stellar, and some data points to gaps in the recovery. Falling unemployment in the US has so far failed to produce the expected acceleration in wage growth. Inflation has remained subdued both in the US and the Eurozone. And, in aggregate, global debt levels have been increasing, raising a potential red flag about the sustainability of growth. But the CIO believes some of these concerns may be overstated:
US wage growth may be better than perceived
In the US the average hourly earnings data in the monthly payroll appears unimpressive and raises concerns about consumer confidence. The June reading of 2.5% year-on-year puts wage growth only marginally ahead of consumer price inflation. But this doesn't account for the fact that individuals might be seeing faster pay rises, engendering greater confidence. The Atlanta Fed's wage tracker showed a healthier 3.4% pace of annual wage growth in May.
Deflation is not a concern
The US's core PCE index fell to 1.4% in May, from 1.8% at the start of the year, raising fears we may be heading toward deflation. But at low levels of inflation, short-term distortions can have a disproportionate effect. While inflation remains lower than the Fed's and the ECB's targets, it's not far off historical averages.
Global debt-to-GDP has fallen if we exclude China
Overall, global debt-to-GDP has risen since the financial crisis, with non-financial sector debt climbing 36 percentage points since mid-2008 to 239% of global GDP. But if we look outside of China, the trend looks much healthier: households and corporates in the rest of the world have reduced their debts by nearly 16% of global GDP since 2008. While the CIO is keeping a close eye on the trend of rising Chinese debt, the country remains relatively isolated from the global financial system.
CIO remains confident
Overall the CIO remains confident in the global recovery. Areas of weakness in some cases are more apparent than real, and the bigger picture is one of broad-based strength. The volume of global trade is at a record level of real global GDP, a sign of healthy global demand. Japan, South Korea, and Taiwan all enjoyed a rise in exports of between 13% and 15% in June and German exports are climbing too. Spending data has also been encouraging. In the Euro area, consumers are spending at a real rate that is faster than the average of the past twenty years. Real US consumer spending growth has stabilised at a level around the post-1990 average. Even the Japanese consumption is growing at roughly twice the pace of the past two decades. There are encouraging signs from industry too, with Eurozone industrial production climbing 1.3% month-on-month in May, the largest rise since November.