Aviva Investors Canada Inc. Fixed Income Quarterly Commentary – June 2017Market Commentary
Commentary Date: July 28, 2017
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GLOBAL ECONOMIC REVIEW AND OUTLOOK
Over the course of H2 2017, global growth accelerated, led by a broad-based recovery in industrial production. Policy support in China saw increased demand for raw materials, pushing up commodity prices, while the stabilization in oil prices in 2016 saw production recover in the US. At the same time the Eurozone recovery picked up pace, encouragingly driven by domestic demand. The broad-based move saw growth for the G20 economies rise to over 3.25% percent in Q4 2016 (compared to the previous year). The improvement in global growth was followed by an even sharper pickup in global trade, with growth in imports from 2016 to Q1 2017 rising at the fastest pace since 2011.
The pace of output and trade growth likely eased somewhat in Q1 2017, with both China and the US slowing. We expect growth to rebound in the US in Q2 2017, while China is expected to achieve their annual target of around 6.5% this year. Most other major economies saw steady or improved growth in Q1 2017, with the UK the major exception. At the same time that global growth accelerated, measures of inflation also began rising. The rapid increase in CPI inflation reflected a stabilization and subsequent increase in commodity prices during 2016. Core inflation remained low and stable in most major economies, with only the US seeing a steady move higher, albeit to a level still below the Federal Reserve’s target. In recent months inflation has stabilized and, in some instances, fallen back a little, again reflecting developments in commodity prices.
CANADIAN FIXED INCOME MARKET REVIEW AND OUTLOOK
Looking ahead, we continue to expect global growth of around 3.5% this year, the fastest rate of increase since 2011. As ever, there are risks to that outlook. On the downside, the policy support in China may be withdrawn more quickly, weighing both on Chinese growth and emerging market economies more generally. On the upside, the recovery in the Eurozone may accelerate more rapidly, with survey evidence pointing to faster growth over the coming months. Overall we expect to see modestly above-trend growth in the major economies (except the UK) this year and think the near-term global growth risks are broadly balanced.
The decline in core inflation in the US has largely reflected a number of temporary factors and should reverse in mid-2018. That said, headline rates of inflation globally are expected to move steadily lower over the coming months as they converge on the somewhat-lower rate of core inflation. While the risks of deflation remain much lower than in 2015/16, the risk of a rapid move higher in inflation from here also seems remote. We expect that with above-trend growth in the major economies this year, spare capacity will continue to be steadily eliminated, which should put modest upward pressure on wage growth and core inflation. We expect the US to be more advanced in that process than others, and as such expect the Federal Reserve to continue raising rates, once more in 2017 and three more times in 2018.
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