Global Macro Strategy

A weekly analysis of timely economic strategy issues from Wells Fargo Investment Institute.

May 23, 2017

Michael Taylor, CFA, Investment Strategy Analyst

Global Growth Trends

  • We believe that the global economy will remain on a slow-but-steady growth course through year-end 2017 and beyond.
  • The Organisation for Economic Co-operation and Development’s leading indicators suggest stable growth momentum for the global economy over the next six to nine months.

What it may mean for investors

  • In developed equity markets, we favor the Pacific region and hold a neutral view on Europe. We are underweight fixed income markets outside the U.S. For emerging-market equities, we favor emerging Asia over Latin America and Emerging Europe, Middle East, and Africa (MENA). We are evenweight emerging-market debt denominated in U.S. dollars.

Overall, the global economy grew just above 3 percent in real terms last year, and we are projecting a slightly higher annualized growth rate for 2017. For nearly five years, the U.S. has been a key driver of global economic growth, but that may be beginning to change. Global growth prospects for 2017 are modestly better than they were last year, primarily due to constructive reforms in the developed economies of Western Europe and Japan and resurgence in many emerging economies of East Asia.

We expect that developed economies should provide the lion’s share of growth momentum in the near term, while we still anticipate emerging-market economies to serve as important engines of growth over the longer term. In this week’s report, we discuss our current views on global growth trends for 2017, mention some key indicators that help us assess global-economic strength, and identify some regions that we believe are likely to contribute to sustained growth.

Forecasting Global Growth Trends

Leading economic indicators are often used to help gauge economic-growth projections. One common leading indicator for U.S. economic growth is The Conference Board’s Index of Leading Economic Indicators (LEI), a topic that we have discussed in past reports. A counterpart to LEI for forecasting global economic growth is the Organisation for Economic Co-operation and Development’s (OECD) Composite Leading Indicators (CLIs).

Chart 1. OECD Leading Indicators Suggest Steady Growth for the Global EconomyChart 1. OECD Leading Indicators Suggest Steady Growth for the Global EconomySources: Bloomberg, OECD, 5/19/17. Past performance is no guarantee of future results.

Like the LEI, the OECD’s CLIs are published monthly. Each month, an aggregate (total) CLI is published covering 33 countries, along with indicators for individual countries and regions. The CLIs are based on several variables that offer insights into the current position of the business cycle, including share prices, monetary data, building permits, and industrial production. They are an important tool used by market analysts to anticipate inflection points in economic activity six to nine months ahead of time. On the whole, the OECD composite indicates a stable growth momentum trend for the global economy in the near term. Below, we examine some current trends in developed and emerging-market economies.

Developed-Market Economies

The CLIs published in May indicate stable growth momentum in the U.S., Japan, the U.K., and many other Western European economies, including France and Italy. In addition, economic expansion is expected to gain momentum in Germany and Canada. Our developed-market forecasts mirror these projections. In developed economies outside the U.S., economic conditions reflect moderately positive trends, offsetting some of the global growth uncertainties from last year.

In the Eurozone, first-quarter 2017 real gross domestic product (GDP) growth was 1.7 percent on an annualized basis (over the previous year’s period). We also see growing strength in Japan, for which first-quarter 2017 real GDP grew by 2.2 percent on an annualized basis (quarter-over-quarter). This figure was significantly above both consensus estimates and the fourth quarter’s growth rate.

At this time, one of the greatest risks to our developed economy-growth projections (including that of the U.S.) could come from trade restrictions, which could have negative consequences for global trade (see Chart 2). In our previous report on international housing trends, we also noted a potential risk posed by rapidly rising home prices in some developed countries, including Australia and Canada.

Chart 2: World Trade Helps Spur Global GrowthChart 2: World Trade Helps Spur Global GrowthSources: Bloomberg, IMF, 5/19/17. Dotted lines represent International Monetary Fund (IMF) growth projections. Past performance is no guarantee of future results.

Emerging-Market Economies

Within the emerging-market economies, the latest CLIs point to stable growth momentum in China and India, and potential opportunities for gains in Brazil and Russia. Uncertainties surrounding economic-growth conditions in many emerging markets have eased in recent months, sparking a broad-based rally in the region’s equity markets. We are projecting emerging-market economies, collectively, to expand above four percent in real terms this year, with a large share of the growth coming from Asia. Broad-based measures of economic activity suggest that China’s economy, the largest of the group, continues to expand. China reported a 6.9 percent real growth rate in the first quarter over the same period last year, a slight increase from the 6.8 percent growth during the fourth quarter of 2016. Yet, we believe that China’s growth rate still is reflective of an economy undergoing a long-term transition from exports to services. Regionally, emerging markets across Southeast Asia should exhibit healthy economic growth rates, including Vietnam and Indonesia.

After struggling for the past few years, Russia’s economy continues to show improvement. Russia’s GDP grew 0.5 percent in the first quarter of 2017 over the same period last year, on the heels of modest fourth-quarter growth. First-quarter growth was slightly above expectations, and the expansion was broad-based—as the trade balance grew (mainly due to higher oil prices), retail sales improved, and industrial production strengthened. Moreover, inflationary pressures are easing, and the ruble is gaining strength alongside the rebound in oil prices. Brazil, on the other hand, continues to struggle from political and economic troubles following a two-year recession. The country’s central bank is forecasting growth for 2017 to turn slightly positive (at 0.5 percent), but that may prove challenging, given that the policy rate is still 11.25 percent and public debt levels remain elevated. Our current view is that Brazil’s declining GDP trend could begin to slow, or even reverse—as we are expecting flat growth this year. Yet, this is a marked improvement over the -3.6 percent GDP decline in Brazil last year.

Investment Implications

Our current global growth forecast reflects a view that modestly stronger economic activity should continue through year-end 2017. Our longer-term outlook for global growth remains upbeat.

In developed equity markets, we currently favor the Pacific region and hold a neutral view on Europe. We remain underweight developed-market ex-U.S. fixed income. For emerging-market equities, we favor emerging Asia over Latin America and Emerging Europe, Middle East, and Africa (MENA). We also are evenweight emerging-market bonds denominated in U.S. dollars.

Risk Factors

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change.

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