Challenge ahead in global recovery

Axa chief economist Bevan Graham. Photo / APN

The global recovery has entered its most challenging stage - the transition from public to private demand as the driver of growth, AXA Global Investors says in its quarterly strategic outlook.

"We are now finding the true strength of underlying final demand and in some countries it is weak," Axa chief economist Bevan Graham said.

The US recovery is slowing and Graham expects it to do no more than muddle through for the next few months. But looking further out, he believes the inherent flexibility of the US economy means it is better placed than other developed countries to rebalance and reorient itself towards the new drivers of global growth, the emerging markets.

Axa's head of investment strategy, Keith Poore, said: "Recoveries from previous financial crises point to US GDP growth close to 2 per cent over the next decade compared with 3 per cent of the decade before the financial crisis."

But a weak American economy could actually be positive for global growth, he said, because the resulting easy monetary condition in the US set low benchmark interest rates for the rest of the world. Further out, however, he sees the balance of risks more likely to deliver higher bond yields (and therefore lower bond prices) so Axa remains underweight in global bonds.

At the same time it is overweight in emerging market equities.

"Over the last decade earnings from emerging markets have grown about 15 per cent per annum, compared with about 5 per cent for developed markets," Poore said. "We don't expect the 10 per cent differential to be maintained over the next decade but we do think earnings growth in emerging markets can outpace developed [ones] by 5 per cent."

Graham sees China's growth slowing, from unsustainable rates, as it sets about the necessary structural shift to growth that is more dependent on internal consumer demand.

Axa forecasts GDP growth of 2.5 per cent this year and 3 per cent next year.

"As with many developed countries, we believe the pathway to lower unemployment will be challenging. New jobs will require a different skill set than the jobs which have been lost, meaning we are likely to see higher unemployment than we have recently been used to, while skill shortages emerge at the same time."