We had underlined two evolving dynamics about global economy on our assessment Monday morning (Early Economy Briefing, 8 January 2018):
1. Pick-up in global production, and
2. Manufacturing industry starts new year faster relative to services sector.
Yesterday morning we assessed the global conjuncture and added the business investment dimension (Early Economy Briefing, 9 January 2018).
The World Bank used the very same arguments in their report about updating 2018 growth expectations:
1.Pick-up in manufacturing, and
Capacity utilization rate in Turkey rose to the level of 79.5% in November. Levels above 79% have not been seen since Lehman period. Intense manufacturing pressures existing capacity. Capacity related issues are not limited with Turkey, either. Capacity utilization rate in Germany stands at 87.2 – similar to Turkey the highest level after Lehman. The ratio in the monetary union reads slightly lower (83.8%), but still the highest level after the crisis like Germany. Moreover, when we look at capacity utilization in terms of trends; Turkey, Germany and Europe have a rising graph in common. In the US due to energy sector related developments the ratio gets lower. However, the USA, Turkey, Germany and Europe share a common denominator: the rising trend in capacity utilization!
Confidence of the real sector in Turkey reads higher compared to consumer confidence. Indeed, Turkish industries are remarkably integrated into global value chain. Confidence indices in the US and Europe reached top levels since 2001 crisis, surpassing the 2008 Lehman mark. Global synchronized growth elevates all countries and gauges across the board at the same time (Figure 1). Investments are emerging in an environment where capacity utilization is imposed and future expectations are optimistic.
Since the end of 2016 major industries in Turkey operate close to full capacity. We kept drawing attention to this topic (Investor Presentation). Because we opined that after the referendum, investments could increase. Our expectation turned into reality and went beyond Turkey. There is an increase in investments in the global sense. In today's digital environment, it is not necessary to expect excessive increases to machinery, plant or property type investments. Nevertheless, in 2018 and beyond, investments will provide a healthy source of growth. The greatest feature of the investments is that they spread over time and their support for growth is not limited to a single quarter.
Figure 1: “Synchronization” in global growth triggers cap-ex.
Source: TurkStat, Bloomberg, Ziraat
Related Bloomberg News article titled “World Bank Raises Outlook as Growth Hits Fastest Pace Since 2011”
World Bank Raises Outlook as Growth Hits Fastest Pace Since 2011
- Broad recovery driven by investment, manufacturing pickup
- Risks remain tilted to downside, development lender warns
By Andrew Mayeda
The World Bank lifted its forecast for global growth, predicting the global recovery will continue to gain steam after reaching the fastest clip in six years.
The development lender raised its estimate for global economic growth for this year to 3.1 percent, up 0.2 percentage point from an estimate in June, it said Tuesday in its latest Global Economic Prospects report. The world economy probably expanded 3 percent last year, which would be the fastest pace since 2011.
Global growth is expected to last for at least the next couple of years, as conditions improve for commodity exporters hurt by the oil crash, said the Washington-based lender. Increased investment and manufacturing activity is driving a broad cyclical recovery, aided by benign financial conditions, loose monetary policy and improved confidence, it said.
Still, the bank said risks remain tilted to the downside, warning an abrupt tightening of financing conditions or spike in market volatility could derail the expansion. The pain would be greatest for emerging markets and developing economies with big external financing needs and weak corporate balance sheets.
“The big picture is a good one,” Ayhan Kose, director of the World Bank’s Development Prospects Group, said in a phone interview. He cautioned that “we need to get ready for the next episode, because history repeats itself.”
While policy makers fretted last year about the impact of President Donald Trump’s “America First” policies, investors have been betting the global recovery will continue. The S&P 500 Index has climbed in the first six trading days of 2018, hitting a record as investors continue to price in the impact of U.S. tax cuts.
The World Bank projects the U.S. will grow 2.5 percent this year, up 0.3 percentage point from its June forecast. Kose said the bank expects the Republican tax cuts passed last month will boost U.S. growth by 0.6 percentage point over the next three years.
The development lender lifted its outlook for the euro zone to 2.1 percent growth in 2018, up 0.6 point from June. Japan will grow 1.3 percent in 2018, compared with a June forecast of 1 percent, the bank said.
China will expand at a 6.4 percent pace this year, up 0.1 point from the June projection, the World Bank said. While Chinese policy makers have continued to rebalance the economy away from state-led investment, corporate credit continues to climb as a proportion of output, according to the lender.
The bank pared its 2018 forecast for India to 7.3 percent, down 0.2 point from June.
The World Bank projects the negative global output gap will close for the first time since 2008, meaning actual output is expected to approach potential. While that should allow central banks to continue or start raising interest rates after a decade of easing, emerging markets should guard against spillovers, the lender warned.
Potential growth has been plodding along below its long-term average, weighed down by weak rates of capital accumulation and slow productivity growth, the bank said. The World Bank sees potential growth slowing to around 2 percent between 2018-2027, compared with 2.5 percent between 2013-17. Policy makers should shift their focus to structural reforms to boost potential growth and living standards, it said.