Will the Roar of Market Tensions Tame Global Growth?

The first quarter of 2018 started out like a lamb but went out like a lion as long-dormant volatility began to roar. Issues like inflation fears, trade tensions and geopolitical risks contributed to market turbulence, leaving many investors wondering whether these issues will put a damper on global growth—and end the US market’s nine-year bull run. Three of Franklin Templeton’s senior investment leaders—Stephen Dover, Christopher Molumphy and Ed Perks—weigh in.

United States, China and Beyond: The Impact of Trade on Global Growth

Ed Perks: Despite some recent challenges, gross domestic product (GDP) growth globally is still accelerating in a coordinated fashion. While the fundamental backdrop looks good to us overall, recent trade tensions, which are part of a protectionist trend, represent one of the bigger risks or concerns we see. I think it’s important to acknowledge that fears of protectionism are not new and have been with us in many parts of the world during the current economic expansion. If it were to materially impact business or consumer confidence, then we could see an impact on economic activity. But right now, we’re in a place where we still expect a pretty robust a period of economic growth, certainly in 2018.

Chris Molumphy: Generally, we would agree that underlying global economic fundamentals appear reasonably healthy, and that has not changed dramatically from the beginning of the year. We are continuously monitoring the recent issues that have come up in regard to trade and geopolitical risks. With respect to trade, we would note that often the political rhetoric ends up being much more significant than the actual actions. We will have to see how this all plays out, but we remain positive regarding the outlook for global growth.

Stephen Dover: For the most part, the global economy is experiencing coordinated growth in a way we haven’t seen in a long time. We’ve seen companies experiencing both top-line and bottom-line growth across the globe. Emerging markets in general have seen strong economic growth—outpacing that of developed markets over the past year—and I think that’s very positive and likely to continue going forward. On the issue of trade, I think we’re probably more in a trade dispute situation than a trade war right now. In our view, the underlying earnings growth we anticipate from the US tax cuts this year and going forward, along with falling interest rates in some countries, are likely to be bigger near-term influences than trade.

Inflation: Is It a Real Threat?

Chris Molumphy: We are starting to see signs of inflation in a number of markets, but that is not unexpected. The United States is in the 9th year of its current economic growth cycle, and with the unemployment rate at 4.1% (as of March 2018), one would certainly expect some increase in inflation at this point in the cycle. Many observers are questioning why we haven’t seen even stronger inflation to date. Our view is that inflation likely will continue to tick up, but the increase is likely to be very gradual. The primary forces that have kept inflation muted—primarily globalization and technological innovation—are still in place and should likely continue to have a restraining influence.