Guru sees boost in major economies

 

He expects that China’s gross domestic product will expand by more than 6 per cent this year but did not indicate whether it would be higher or lower than 6.5 per cent.

Meanwhile, the investment theme for central banks and investors in the next period should be diversification and the transition away from bonds into equities, while economies with successful reforms will attract most of the capital flow.

Low global oil prices are also expected to continue from the increase of supply and the unavoidable slowdown of demand for investment caused by advances in technology and reform efforts around the world.

“In the short run we can expect to see continued broad-based improvement in the world’s macroeconomic outlook, as we are seeing growth gain momentum in all the major advanced economies,” Hildebrand said at the Bank of Thailand’s fifth “Policy Forum” yesterday.

Hildebrand, who is also the former chairman of the governing board of the Swiss National Bank, said growth was re-accelerating in the United States after a disappointing first quarter, while inflation was no longer falling. Unemployment is finally near pre-crisis levels in the US, Britain, Japan and Germany.

More important, real wages in those advanced economies are also beginning to show signs of growth.

“This is all good news that I [would not have been] able to give you as recently as a couple of months ago, and until very recently inflation had continued to fall in the major economies throughout the world,” he said. 

Hildebrand added that while Asian emerging markets were still enjoying growth that outperformed their counterparts elsewhere, “much of it depends on China’s performance and so far, despite financial-market scares, GDP growth no lower than 6 per cent [in China] is still within reach”.

Nevertheless, there are still exceptional uncertainties in the timing, the speed and the sustainability of a global recovery. “We just do not know how financial markets are going to behave in response to the various impulses they face.”

BlackRock has highlighted that the most significant risks for the financial markets in the next period are too-quick or too-late US interest-rate normalisation, a hard landing in China and the country’s failure to transition from an export-driven to domestic-dependent economy, and Greece’s possible exit from the euro.

The uncertainty is being driven by “four unique and unprecedented forces”. These include rising public and private debts; prolonged and enormous central-bank presence in asset markets distorting asset prices; and the ongoing transition to new regulatory regimes for central and commercial banks, which includes the composition of their balance and business models. The fourth force is new technologies such as big data and free search engines slowing down the need for input (investment) for the same output (productivity).

“Debt levels, both in the public and private sectors, has reached historic highs, and indeed debt levels have risen since the crisis [in 2008]. If they do not decline, the recovery will be built on very shaky ground,” he said.

“For investors, this context of uncertainty will require flexible positioning … and there are strong reasons to pursue portfolio and reserve diversification” and to be more discriminating in assets selection as a response to the fluctuations.

Hildebrand said Greece’s debt situation was “a sad story” but the potential of a “Grexit” was no cause for concern at the moment as the short-term contagion risks could be managed. However, its long-term effect on the stability of the European Union is more worrisome.

“When the next sizeable shock hits the euro zone down the road – and it will at some point – it is a very different story when you know that a country can leave the union,” he said.