Giving his 2018 Financial Standard Chief Economists Forum preview, Principal Global Investors chief global economist Bob Baur says it's hard to find any near-term threats to the global economy.
Speaking to Financial Standard, Baur said the world economy is travelling better than financial markets, and although this will continue in coming years it is likely to decelerate.
At the 2017 forum, Baur detailed how the world was in a synchronised upturn - a call he believes rang true this year and one which eventually morphed into "a synchronised world expansion."
"All during last year the world economy continued to pick up steam and now we've got a very robust global economy. Depending on how you calculate it, world growth is in the 3.5% range or maybe a little more and it could pick up in the next couple of quarters," he said.
"If you look at the OECD - they track 45 countries - and I believe at last count all 45 were growing, and 30 of them were accelerating. We expect this robust expansion to last well into 2018, probably into 2019."
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The deceleration he refers to though is part of a broad theme where economically the world returns to the "old normal".
"The old normal to me is where growth is pretty good; where people are confident; where companies are expanding, and capital spending is growing; wage growth is picking up; job growth is pretty good and people have a good outlook and are looking ahead," Baur said.
In the last decade or so people around the world were scared of relapse; the central banks were worried about deflation and Baur thinks those worries are going away. He said it's important to keep the distinction between the economy and financial markets.
"If you think about the economy with robust world growth and stock markets screaming higher, but yet we've had interest rates at depression era lows," he said.
If interest rates pick up back to what Baur thinks is more normal, it's "going to cause some volatility for financial markets that we've not been used to of late."
"If it's the case that interest rates are below where they should be - like in the US we've got nominal growth of 4.5 to 5% and yet interest rates are at 2.3% - that's not an equilibrium situation," he said.
Either growth is going to slow or interest rates are going to pick up. Baur believes it's more likely that interest rates will pick up, which is going to make it difficult for financial markets in the sense that years of low interest rates have pushed almost all asset prices to high valuations.
He adds higher interest rates are not going to be good for emerging markets which like a weak dollar and bringing rates back to normal is not going to be positive for either emerging market stocks or bonds.
In terms of other asset classes, Baur likes commercial real estate in various parts of the world.
"Not every city in the US nor in Europe, but I think there are places where job growth is good and commercial real estate will still be okay. Cap rates may rise but property prices might not go up much, but I think with a little inflation we'll get higher, gradually increasing rents. In some sense commercial real estate might be a decent investment during that time," he said.
"One asset class that could be good during this time is shorter-term bonds. I think if two-year Treasury yields get up to 2%, and they're not very far from that now, they'd be a good buy."
Bookings are now open for the 2018 Financial Standard Chief Economists Forum. It is being held in Melbourne on 6 February and in Sydney on 8 February.
Speakers at the breakfast event include:
- Roger Aliaga-Diaz, chief economist, Americas, Vanguard
- Sally Auld, chief economist and head of fixed income and FX strategy for Australia and New Zealand, J.P. Morgan
- Bob Baur, chief global economist, Principal
- Jeremy Lawson, chief economist, Aberdeen Standard Investments
- Mark Tinker, head of Framlington Equities, Asia, AXA Investment Managers