Despite a tumultuous month for equity markets, the current period of steady expansion of the global economy continues. The expansion, however, has become less balanced and may have peaked in some major economies.
The world economy remains strong and the near-term outlook is fairly bright, despite the recent escalation in trade tensions. Global growth is robust as major economies continue in mature phases of an extended economic expansion.
Generally, the month of May was consistent with the 2018 story of a global economy entering a mature stage characterised by market volatility, the gradual emergence of inflation, higher interest rates (primarily in the US) and a softening of global economic growth indicators.
Since February, equity market volatility has jumped from historically low levels, although this largely seems to have been technically-driven. Continued synchronized global growth and historically low interest rates are still supportive of equity markets, while economic indicators are not yet signaling the end of the business and market cycle that started in 2009.
Potential trade wars and interest rates have dominated the news in March. The first quarter of 2018 continues to show signs of more volatility and nervousness in markets particularly as the US, being furthest of the advanced economies through its cyclical growth, presents a different economic narrative to the rest of the world.
Aside from the February turbulence in equity markets, global economic growth should hold up well and inflation should remain low in 2018.
The recent hard economic data and survey evidence suggest that the world economy is growing at a rate over 3% pa and there is enough spare capacity in many economies for the expansion to continue for a while yet.
Global GDP growth of 3.3% (last year 3.2%) is expected in 2018 broadly to support share markets, but it may still be a pivotal year for the markets as many of the larger central banks around the globe are moving in unison on a path towards monetary normalization, and therefore higher interest rates.