Recently, the scenario of a recovering global economy has become more likely. In line with the textbook, share prices have been up, and the prices of safe government bonds have been down. Moreover, the US dollar, inherently often anti-cyclical, has depreciated against a currency basket, writes Gerhard Winzer, Head Economist within Erste Asset Management, the fund administrator of Erste Bank,

But what are the main the reasons for this development and the necessary conditions for its continuation? Well, according to his opinion, first apperead on Erste Asset Management’s blog, the author identifies some positive reasons, argued below.

First of all, the outlook on an agreement in the conflict between the USA and China has improved. The agreement will probably not affect all areas of conflict (trade, technology, finance, currency, patents), and both countries might agree on a truce. This means that the downside risks (tail risks) for the global economy have decreased.[emaillocker]

Also, the signs of stabilisation in the weak, i.e. hardly growing sectors of the global economy have increased. This applies to industrial production as well as corporate capital expenditure. The global purchasing managers’ index in the manufacturing sector is an important indicator in this context. In October, it recorded its third consecutive increase. The indicator that has recorded the most significant decline since the beginning of 2018, i.e. the sentiment in the business sector, has shown signs of bottoming out.

The central banks have re-embarked on (net) purchase programmes again and are buying government bonds. While the Federal Reserve only buys short-term T-bills, the effect of rising liquidity still feeds through to the market. The result is a looser financial environment (i.e. financial conditions), which means that many asset prices have increased over the year. This supports economic growth, albeit at a considerable time lag.

Also, fiscal policies have turned slightly looser as well. The relevant indicator in this case is the federal budget exclusive of interest payments, adjusted for the effects of the economic cycle in relation to the potential output of the economy. From 2018 to 2019, the aggregate figure for the OECD area declined by 0.4 percentage points to -1.4%. This has a marginally positive effect on economic growth.

As far as the credit environment is concerned, the development in China stands out. From the beginning of 2016 to the end of 2018, the credit impulse – i.e. the change in credit growth in relation to economic growth – was negative. On top of the increased geopolitical uncertainty and the reduction of global money supply, this was probably one of the main reasons for the weakening of global economic growth. Since the beginning of 2019, the credit impulse in China has been positive, albeit only slightly.

Source: Erste Asset Management