In recent weeks economic data have come in above expectations in the US, in the Eurozone and in the developing economies. They represent the reaction to ongoing low interest rates, a recovery in oil prices, a major and successful stimulus effort in China, country-specific developments (e.g. in Brazil) and the expectation of fiscal expansion in the US. The broad based nature of these developments should imply that better momentum in one region would have a positive impact on others and vice versa.
BNP Paribas Group Chief Economist William De Vijlder discusses the latest market drivers.
As always, there are a lot of uncertainties. One is a pick-up in inflation. Because of the rise in energy prices, the increase in headline inflation should be a global phenomenon; the key question will be to what extent it spills over into core inflation via higher wages and sales prices. That in turn will depend on the gap between the unemployment rate and the natural rate of unemployment. This gap has basically disappeared in the US, so all eyes are turned towards the Federal Reserve. Its decisions will also have to factor in the prospect of fiscal stimulus and the question of whether a proactive or reactive stance when tightening policy is appropriate.
Inflation is also becoming a hot topic in the UK, following the decline of sterling after the Brexit referendum, and in Germany because of its strong growth performance. This in turn focuses the attention to the divergent inflation performance amongst the Eurozone members and the challenge it creates for the ECB. Central bank communication will continue to grab headlines this year. Amongst the other uncertainties we have to mention mounting concern about policy measures weighing on international trade and the many elections in Europe.