World economy: Upbeat about the outlook - Nomura

Analysts at Nomura have raised their global growth, inflation and policy rate outlook thanks to a more procyclical thrust to fiscal policy. 

Key Quotes

“Although the recent bout of volatility in financial markets is an important risk, we remain upbeat about the outlook for the world economy. Indeed, this month we have revised up our outlook for global growth for 2018 from 3.9% to 4.1% off heightened optimism about the US and Eurozone economies. Those revisions can mostly be traced to a procyclical thrust to fiscal policy, particularly in the US. But since that thrust has occurred at the same time as capacity pressures have become more acute, as optimism among companies has been at (or close to) multi-year highs and as corporate profitability has remained strong, capex has additionally been a key source of the world economy’s unexpected vigour. Indeed, we expect that firmer capex and higher productivity to lay the foundations for even stronger growth in the coming months.” 

“In light of those growth revisions, we now expect inflation and monetary policy to normalise a little more rapidly relative to our previous forecasts, as well as relative to market expectations. More specifically, on monetary policy we now expect the Federal Reserve to raise short-term rates four times this year and twice more in 2019. We had previously expected three hikes in 2018 and only one in 2019. We still expect the ECB to cease its asset purchase programme from September and to raise short-term rates by 10bp in December, and we expect the Bank of England to raise rates by a cumulative 50bp in 2018. An important and notable exception to this global trend is likely to be Japan, where we still see little scope for the BOJ to withdraw policy stimulus.” 

“Peering through the specifics and looking at the bigger picture, the key issue in our view at present is that fiscal policy is becoming more expansionary at a time when many economies are already at (or close to) full employment. That is unusual. But this comes at a time when monetary policy settings are still very accommodative and at a time too when that pro-cyclical thrust to fiscal policy is occurring when government indebtedness is still very high. It almost goes without saying that against that backdrop, the risks to our inflation and interest rate forecasts are skewed to the upside.”