Europe’s in political turmoil. The United States is in political turmoil. Mexico is under red alert from Trump immigration and trade policies. Venezuela is falling off the map. South Korea is on the cusp of becoming a war zone. Stop the world, we want to get off!
While political soap operas and rumors of wars make daily political news headlines, the financial and business headlines are better. Later today, the OECD will release their economic outlook report which is likely to confirm more upside to global GDP, led by the U.S. and recovering emerging markets. The potential risks to that forecast are slower than expected growth rate for the Chinese economy (National People’s Congress on Sunday released its forecast; you guessed it: 6.5%) and legislative surprises in the United States.
Alongside a brighter economic outlook there is also evidence of increasing inflation pressures in the core economies. Recent European PMI surveys impressed, and here at home, our Fed’s regional surveys are showing purchasing managers feeling the pinch of rising costs due to inflation. Some of this might be related to the recovery in base metals. For instance, the iPath Bloomberg Copper Sub-Index (JJC 19,56 0,00 0,00%) ETF is up 26.8% over the last six months, clobbering gold and oil.
Consumers have not paid the price for that yet, so economists think that is coming down the pike. Wait for it.
Based on a number of research reports from the big investment banks, investment analysts are certain that global demand is rising. One measure of this is the Baltic Dry Index, a favorite of traders and investment firms looking to gauge trans-oceanic shipments of goods. It’s up over 170% in the last 12 months.
OECD numbers will be positive, They will likely err on the side of caution because of political headwinds. Core inflation rates in the advanced economies are not high enough for central banks in Europe and Japan to shock with bigger rate hikes.
Equity investors are ready for higher rates anyway; in Japan, in Europe, and clearly in the U.S. They are also ready for inflation. Inflation is better than deflation, which is usually associated with economic depression. Unless geopolitics get uglier, it seems all systems are go for growth in 2017.