NN IP: An optimistic view about global growth

NN IP: An optimistic view about global growth

Outlook vooruitzicht (09) koers omhoog koersgrafiek

By Maarten-Jan Bakkum, Senior Emerging Market Strategist at NN Investment Partners

We maintain an optimistic view about global growth, even though the spread of the coronavirus Delta variant and persistent bottlenecks in supply chains have been a drag on momentum. The growing likelihood of significant fiscal stimulus in China is one of the main reasons for our constructive view on growth prospects.

Risky assets continue to trend higher despite the recent moderation in global growth momentum and ongoing preparations of the Fed to start tapering its quantitative easing. The coronavirus Delta variant continues to spread, particularly in those areas with low vaccination rates. Countries such as Australia and Vietnam have been faced with a spike in infections and had to tighten mobility restrictions again; others, like Indonesia and Thailand, have seen infection numbers decline and are lifting lockdown measures. Strict travel restrictions in China have been instrumental in swiftly containing the Delta infection wave, which earlier this month caused new global growth concerns.

Global growth levels remain elevated, despite the Delta-driven decline in momentum and the continuing bottlenecks in supply chains. We remain optimistic about the prospects for growth for the following reasons:

  • Excess savings, pent-up demand, and tight labour markets in the US and Europe should sustain consumer demand;
  • Business confidence and strong corporate balance sheets should boost fixed investment growth
  • Bank lending surveys show a strong pick-up in credit supply and demand;
  • Policymakers in developed markets are unlikely to reduce economic stimulus much in the coming quarters;
  • Fiscal stimulus in China should help the country’s fixed investment and import growth accelerate before the end of the year.

These five factors are likely to keep global growth above-trend in the coming quarters. The spread of the Delta variant and supply bottlenecks are the main risks and need to be watched closely, but the recent acceleration in the vaccination roll-out should prevent new mobility restrictions in most countries. And the combination of new investments and higher prices should help supply and demand to find new equilibrium levels in global goods trade and transportation.

We maintain a modest risk-on stance in our multi-asset model portfolio. With moderate overweights in equities, Eurozone high yield and crude oil, we should continue to benefit from the continuing post-pandemic growth recovery. Our moderate underweight in US Treasuries, which also has a better chance of performing well in a steady growth environment, should benefit primarily from shifting monetary policy expectations.

In this context, the Fed and its cautious path towards QE tapering will be a key factor to watch. We still expect the Fed to announce policy tapering in November and start reducing its asset purchases a month later. We may hear more at Friday’s annual central bankers’ summit in Jackson Hole. Fed Chair Jerome Powell’s speech might provide new insights into his recovery expectations and whether the FOMC thinks the progress towards the central bank’s inflation and maximum employment goals is getting closer to being “substantial.”

Prospects for policy easing in China

The likelihood of fiscal stimulus in China is one of the reasons noted above for our constructive view about global growth. Judging from the number of questions we have received on this topic in the past weeks, we see that a growing group of investors are also aware of its relevance.

In their response to the fast economic activity normalization since March 2020, the Chinese authorities moved rather quickly in withdrawing the pandemic-related stimulus. This led to a faster-than-anticipated fiscal tightening the last quarter of 2020, when stimulus reached its peak. As a result, China’s broad fiscal deficit declined from 8.5% to 5.5% of GDP in the first half of 2021.

In July, the government expressed its first concerns about the impact of the tightening on growth momentum. Investment growth in particular had started to slow, which in combination with expectations of peaking global trade was the reason the government moved explicitly to a policy easing bias. The change in bias was signaled by the reserve requirement ratio (RRR) cut announced on 9 July.

Since then, several official statements have reflected a broadening easing effort. Three observations are key here: first, the easing will be mainly on the fiscal side; second, the focus will be on infrastructure investment and reducing the tax burden for the private sector, mainly for small and medium-sized companies; and third, the modest monetary easing that we can expect will probably be targeted rather than broad-based.

Broad credit growth in China reached 7.4% in July, about the same as our expectation for nominal GDP growth in Q3. So there is currently no significant leverage growth, nor should we expect credit growth to move much higher than nominal GDP growth in the coming quarters. Only in the event of a new external shock to Chinese growth will leverage growth be allowed to be clearly positive again, as we saw in the first two quarters of 2020 (see figure).

Chinese leverage

2508 NN IP

Source: NN Investment Partners

The strong focus on reducing and containing financial system risks is why the central government is avoiding leverage growth and managing the fiscal stimulus. Local governments are no longer in the lead, as they were in 2008-2009, when excessive risk-taking via non-transparent local-government financing schemes led to a sharp rise in non-performing loans. Now, financing will be primarily via the issuance of regular central government bonds.

Starting in September, issuance should rise substantially, given the underutilized quota of government bonds in the first seven months of the year. As a result, construction and fixed-asset investment growth should start to rise as early as the fourth quarter. This should be a positive factor for Chinese commodity imports and might give another boost to commodity prices, primarily in industrial metals.

The Chinese government’s zero-tolerance approach to the pandemic probably means that some form of travel restrictions will remain in place in the short term. This will likely keep some pressure on consumer services expenditure, which was already clearly visible in the July data. If anything, this increases the urgency of new public investments to prevent a large drop in overall domestic demand. All in all, the case for meaningful fiscal easing in China has become stronger in the past months.