The current recovery has been almost unremitting gloom. First there was the global financial crisis, then the eurozone sovereign debt crisis, then Chinese hard landing fears, then the collapse in commodity prices (which wasn’t the boon for commodity importers that many expected) and now Brexit. However, there may be a temporary lightening of the mood.
Fulcrum Asset Management do a good job of turning current data into GDP “now-casts” and they think there has been a distinct upturn in the third quarter. The table shows four large developed economies and four large emerging ones. Six of the eight are expected to see faster growth in the third quarter than the second. The two exceptions are Japan (not a new occurrence) and the UK (thanks to Brexit).
Why should this be? Well, monetary policy is loose and credit conditions are favourable. Six of the eight countries above have cut interest rates and/or eased policy in other ways over the past 12 months (including the UK last week): only one (the US) has raised interest rates. On the credit side, for example, last month’s ECB bank lending survey found that credit standards had eased, loan demand had increased and euro area banks had easier access to funding.
Moreover, the US, the eurozone and China are all easing fiscal policy somewhat this year. Judging fiscal stances is an art rather than a science. However, the IMF and the OECD both have a stab at calculating underlying budget balances twice a year and offer the clearest guide. They reckon that only three of the eight – Japan, the UK and Brazil – are actually tightening policy but that is likely to change in the UK’s case.
Turning to the third arrow, there has been some structural reform among the major economies but not much. There has been some in the eurozone and Japan, thanks to prodding from the IMF and others, but nothing of note in the US and UK. It is a similar picture among the BRICs where China and India have made helpful changes but Brazil and Russia have done little.
Thus, slightly faster growth in the third quarter (and maybe the fourth quarter) looks like a brief sunny spell in an otherwise cloudy day. This does not look like the start of a golden age but rather a temporary respite from plodding performance.
What does this mean for markets? Both bonds and equities have had a great run, mainly due to easier monetary policy in Japan, the eurozone and the UK this year and delayed tightening from the Fed. The recent pick-up in growth will also have helped equities and corporate bonds.
However, valuations are now stretched to very stretched in almost all markets and a set-back is overdue. However, are we on the verge of the next recession and equity bear market? Probably not. It may be time to ratchet back the risk in portfolios.
