- Global GDP and Inflation continue to rise
- Consumer spending in the U.S. and government spending in China are the key drivers
- AUD and commodity currencies will benefit
Australia and the Australian Dollar have been one of the beneficiaries of the upturn in global growth and inflation over the last six months. AUDUSD is up nearly 7% from the January lows, prompting the RBA to acknowledge ‘the global economy entered 2017 with more momentum than expected’ in its February statement.
To understand if the Australian Dollar (and commodities) will continue advancing, it is important to know what is driving global growth. The recent upturn has been synchronized, with China and US once again the primary drivers, and surplus economies going a long for the ride. But what exactly are the catalysts, and are they sustainable?
A Return To Normal
It’s important to note that the recent upturn is more a return to normal than a massive wave of prosperity. The long period of near-zero rates and central banks propping up world economies is slowly abating. GDP and inflation are picking up, but with U.S. GDP and inflation both around 2%, clearly we shouldn‘t get carried away.
The Key Drivers of Growth
HSBC released a new note today looking at some of the key features of growth in the U.S. and China,
‘For much of the past two years, consumer spending has been the major driver, particularly Western households whose spending power has been boosted by higher employment and lower oil prices…
…More recently government spending is playing a bigger role in supporting global growth, particularly in infrastructure investment in China, while tax cuts and some types of public spending should support US demand in late 2017 and 2018. Both countries are hoping that their fiscal stimulus will ensure stronger, or at least stable, growth and that together with deregulation in the US and reforms to level the playing field between SOEs and private sector in China, will feed through into stronger private sector demand growth and higher productivity.’
These are familiar drivers for both the U.S. and China. Consumer spending has always been a major component of U.S. GDP. However, HSBC identifies certain risks from relying on consumer spending too heavily:
‘The oil windfall is already started to fade. The consumer-driven expansion of the past two years has not been trade-intensive though, which may be a sign of things to come given ageing populations whose spending is increasingly services based. Besides, history has shown that consumer-driven growth not followed by an investment and productivity recovery tends to be less sustainable. Invariably it leads to the build-up of imbalances and greater financial stability risks. ‘
Again, much depends on Donald Trump’s expansionary policies. Tax cuts, defence and infrastructure spending, and de-regulation will all boost the economy. However, as we have seen very recently with the failure of the Republican’s replacement for Obamacare, the promised policies may struggle to make it through both Houses. This could cause major headwinds for global growth as consumers alone cannot support the upturn indefinitely.
China Heating Up
Growth in China picked up at the end of 2016, with nominal growth at a three year high of 9.9%. This was stimulated by infrastructure and property investment, with the industrial sector also rebounding. HSBC believes, ‘while infrastructure investment is likely to remain strong in 2017 as well, we could see a moderation in property investment, as the full impact of property tightening measures start to be reflected in the system.’
The main risk to Chinese growth is the slow rate of private investment, which is crucial for the sustainability of the current upturn. Protectionism is also a concern, especially given the rhetoric from the new administration.
AUD Trades
It may seem odd, but to evaluate the strength of a commodity currency like AUD, we must analyze the economies of the U.S. and China.
With the U.S. economy driving growth, the USD may remain strong. Consequently AUD may be a better buy against other currencies less reliant on commodities and reflation such as NZD and GBP.