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Losing sight of the triggers

Economic Outlook

March 2016

Home / Perspectives / Economic outlook Losing sight of the triggers…

Neil Williams, Group Chief Economist
08 March 2016
Economics
  • economic-outlook-q216-thumbnail2The voracity of market moves since New Year belies the underlying deterioration in the major economies. Certainly, there are vulnerabilities exposed by the start of US rate tightening, & China slowing. But, the danger now is the reaction outweighs the reason.
  • Sharp equity declines are traditionally associated with key macro shocks &/or a toxic policy mix. Current policy can hardly be accused of being toxic, suggesting China & the US Fed are the main culprits. Yet, their main macro risks should still be contained.
  • Even with ‘true’ real growth of just 3%, China in 2015 will have generated over two years nominal growth equivalent to the entire GDP of Spain. Expecting it to carry on doing more was unrealistic.
  • Then there’s the Fed. Its expectation of raising the funds target to 3½% after 2018 looks unrealistic. But, we doubt it will be dissuaded from hiking again in this cycle. We expect two more 25bp US rate hikes by Christmas, taking us to a still low 1% ‘peak’ rate.
  • Which suggests another two years of negative real rates - in the US & UK - on top of the six years we’ve had. The ECB & BoJ will have to make their rates more negative, aiming to keep long yields down.
  • A complication for the UK, though, is its EU referendum. Our base case is Brexit is avoided. But, uncertainty will build, & should Brexit occur, the BoE may have to be the biggest sponsor of gilts, via QE.
  • China has the wherewithal to soften its landing, but must avoid a policy ‘face-off’ with the US. Renminbi devaluations are an extra incentive for the Fed to take only baby steps. Fortunately, China should prefer ‘drip-feed’ devaluations to help its balance sheets.

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Neil Williams Group Chief Economist Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 29 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.
Read all articles by Neil Williams