OCEAN CITY — It may be too much to say that our winter of discontent, from an economic perspective, has completely thawed, but we see initial signs that economic activity is improving. We continue to believe global growth is on track to strengthen, albeit at a slower rate than expected at the beginning of the year, led by developed markets.
In our view, the recent disappointment in growth in the U.S.,
particularly the contraction in gross domestic product (GDP) for the first quarter, reflects temporary or transitory factors. More recent forward-looking reports have been positive, and leading economic indicators point to stronger growth in the second half of the year. Employment continues to show signs of improvement, with non-farm payrolls growing by 288,000 in June, bringing the three-month moving average to a robust 272,000.
Inflation in the U.S. should remain low, although recent readings show signs of a bottom. Our BofA Merrill Lynch (BofAML) Global Research U.S. Economics team believes inflation, as measured by the Consumer Price Index (CPI), will continue to hover around 2%. The Federal Reserve’s (Fed) preferred measure, the Core Personal Consumption Expenditure (CPCE) Price Index, was up 1.5% year-over-year in May, still sluggish and short of the central bank’s 2% target. While there is a lot of talk about higher wage growth, there is very little evidence of it and any increase should be very slow.
In our view, the Fed is likely to stay the course, reducing its tapering of bond purchases by $10 billion at each meeting of the FOMC. We believe it remains much more focused on ensuring the recovery is sustainable than slightly overshooting its inflation forecast. Our BofAML U.S. Economics team expects the Fed to start considering rate hikes in the spring of 2015 but to hold off raising rates until the fourth quarter of that year.
In the Euro area, overall growth is expected to accelerate slightly to 1.1% this year, although the picture is mixed — forecasts continue to improve in core countries like Germany and more troubled nations like Spain, while the outlook in France has become more concerning. The lack of inflation and even worries over deflation remain concerns across many countries in the Euro area.
In Emerging Markets, growth remains moderate. There is stronger growth driven by external demand in places like Mexico and Korea, but Emerging Markets overall have been weaker than expected this year. They have been hurt in part by a slowdown in China, the soft U.S. economy and emergency rate hikes in some of the more vulnerable countries.
Meanwhile, inflation in many economies has been pushed upward by currency depreciation and cuts in subsidies, with increases in food prices becoming a larger part of the problem.
Chinese growth has started to show signs of stabilization, with support from the government’s mini-stimulus plan. BofAML Chinese Economist Ting Lu expects the government to speed up fiscal disbursements to boost railway construction and housing, and the Chinese central bank is expected to use targeted measures to support lending and stabilize interest rates.
Our BofAML Global Economics team now forecasts Emerging Markets to grow 4.5% in 2014, the same as 2013. Globally, growth is expected to improve from 3.1% this year to 3.7% in 2015.
(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)