The desynchronisation of the global cycle

The desynchronisation of the global cycle

The global economy is expected to continue to grow at a healthy pace in 2018 and 2019 albeit mirroring more diversity in an asymmetric reaction to a series of shocks on energy prices, political uncertainty and interest rates

The global economy has probably passed the peak of its current cycle

Global economic growth is set to accelerate further in 2018 to +3.3% y/y, after growing by +3.2% in 2017. The global economic landscape remains good, despite the emergence of cycle de-synchronization. Without a doubt, this phenomenon is crucial to both understand and anticipate the economic momentum. This de-synchronization will result in asymmetric answers from national economies to three global-scaled shocks.

First come commodity prices, in particular oil prices, which surged faster than expected. The Brent price reached the USD 79/bbl mark during May 2018. This general increase may favor exporting countries in the short term. It will also increase input prices and lead to a noticeable rise of global inflation in the upcoming months. However this hike should be temporary, and will not destabilize the global economy – we are forecasting stable oil prices around USD 69/bbl in 2019 – given that central banks are not likely to over-react to heightened inflation.

Then is the interest rate shock, following a faster than expected monetary policy tightening in the US. Indeed, the fiscal stimulus initiated in the US in 2017 appears to be more powerful than previously thought, while recent measures of financial deregulation will stimulate further the economy.

In this context increasingly resembling overheating, added to riskier behavior around corporate debt and financial activity at large, the Fed will toughen its line. We expect two more rate hikes in 2018 and two additional ones in 2019.

The normalization of the American monetary policy will inevitably result in unstable volatility and increased Dollar value – we are expecting a +5% appreciation in the Dollar index in the next six months. As a consequence, it will put most fragile economies under pressure , i.e. those characterized by persistent fiscal, commercial or price disequilibria. This will lead to a mounting discrepancy between weak economies – those showing high debt stocks or insufficient record of reducing imbalances in the last two years, despite a very favorable climate and stronger ones.

Finally, there is a global perturbation due to a shock of economic policy uncertainty, following protectionist moves and a historical overhaul of America’s foreign policy. The “America First” policy already had, and will continue to have deep consequences. One needs to analyze this new paradigm from a historical perspective, taking into account the traditional role played by the US as a supplier of public goods at the global level. It has long been a purveyor of security through NATO and the UN, of free trade through multilateral rules under the WTO and an economic power with a big influence within the G7 and G20. At every level, one can foresee a disengagement from the US, thus redefining international talks. The divide between economic and military rationales has blurred, with the Trump administration no longer hesitating to ask for commercial and financial compensation for its geostrategic contribution. Global multilateralism is clearly on the decline, triggering a negative shock of uncertainty around economic policy. The rise of populist regimes and their reaction to de-synchronized economic momenta will be the last source of asymmetries in the months to come.