Private consumption is the most important demand driver of the overall global business cycle. Without consumer spending there is little need for companies to expand capacity and investments will be weak as well. Countries with a large manufacturing sector – which to a large extent is in emerging markets (EM) – also suffer and go through a period with overcapacity and deflationary pressures.
Hence, amid all the noise in the data, it is important to keep an eye on the underlying demand driver: consumer spending. Fortunately, there is plenty of good news in this area. While lacklustre spending by western consumers has been the main problem for the global economy in recent years, the rebound in consumption is similarly the primary explanation why the global recovery is now taking hold.
This week provided yet more evidence that the main engine of global growth is gaining more power: euro area consumer confidence reached a seven-year high and UK retail sales are now rising at the strongest pace in 10 years. US households have also geared up again recently following a weather-related dip over the winter months and in April, personal spending showed the strongest y/y rate since 2011.
Western consumers have thus seen a further pick-up in spending over recent months supported by rising real wage growth (mainly due to low inflation), robust wealth increases and improving job markets, as unemployment is falling in most countries now. Economic uncertainty is also low compared with recent years where the euro crisis and US political brinkmanship kept consumers at home.
Looking forward, households in the US and Europe are likely to continue to gear up spending as job markets pick up further speed. The fiscal policy drag will also fade more and accommodative monetary policy is expected to support further wealth gains from both housing and financial assets.
As consumption strengthens, we expect it to increasingly spill over to investment growth as well. Emerging markets, which produce a large part of the products consumed in the west, will see a more positive environment in the export markets. We look for global growth to go up a notch in H2 14 to global growth of 4%-plus from sub-trend growth in the early part of the year.
Recovery and central banks support risk assets
With consumers providing a firm anchor for global growth and short-term indicators pointing to re-acceleration in the US and China, the macro environment is giving increasing support to risk assets – especially when stronger growth can go hand-in-hand with no inflation pressures and very accommodative monetary policy. Upcoming policy easing from ECB should add further fuel to risk assets. Rising M&A activity is providing an impetus to the stock market as well. We thus retain a positive view on stocks on a three-month horizon.
To Read the Entire Report Please Click on the pdf File Below