Overseas Headlines – March 7,2018

 March 7, 2018

United States:

CFO Optimism About U.S. Economy Rises to Record After Tax Cuts

Chief financial officers in the U.S. are feeling better than ever in the wake of federal tax cuts enacted late last year. A measure of CFOs’ sentiment about the U.S. economy rose 2.6 points to a reading of 71.2 in the first quarter, the highest level since the survey began in 1996, according to a quarterly report Wednesday from Duke University’s Fuqua School of Business and CFO Magazine. Two-thirds of executives said that corporate tax reform is helping their firms, with 36 percent describing the overall benefit as medium or large. “The extremely high level of business optimism is tied to the recently passed corporate tax reform,” John Graham, a finance professor at Duke, said in a statement accompanying the report. “Our analysis of past results shows the CFO Optimism Index is an accurate predictor of future economic growth and hiring, therefore 2018 looks to be a very promising year.” President Donald Trump in December signed the Republican-backed legislation slashing the corporate income-tax rate to 21 percent from 35 percent, placing the U.S. just below the worldwide average of 22.5 percent. The effective rate for U.S. companies is expected to fall from 24 percent to 18.8 percent, according to the Duke report. Forty-four percent of U.S. companies plan to increase wages more than they would have without tax reform, the survey found. Thirty-eight percent plan to increase employment and 31 percent will increase cash holdings. Among companies with defined benefit pensions, 28 percent say they will increase pension contributions. Dozens of U.S. companies from Walmart Inc. to AT&T Inc. announced pay increases and bonuses for their employees in the weeks following passage of the tax bill. Even so, critics of the legislation say it’s poised to benefit shareholders over workers. Stock buybacks will total a record of around $800 billion this year, up from $530 billion in 2017, according to estimates from investment strategists at JPMorgan Chase & Co.



U.K. Services Prop Up Economy on Better-Than-Forecast Growth

U.K. services activity grew more than expected in February, supporting economic growth and keeping alive the prospect of an interest-rate increase within months. IHS Markit’s Purchasing Managers Index for the biggest part of the economy jumped to 54.5 — a four-month high — from 53 in January. That’s well above the 53.3 reading forecast by economists in a Bloomberg survey. The composite PMI also rose, though only to a two-month high. The report showed that new business picked up for a second month and the backlogs of business increased, which bodes well for the coming months. There was also a warning about skills shortages from service companies. While Markit’s manufacturing index for February declined, construction performed better, and it said the surveys show a “steady pace” of economic expansion is being maintained. It estimates growth of 0.4 percent this quarter, matching the rate of the final three months of 2017.



China’s Economy to Overtake Euro Zone This Year

In another sign that the “Asian century” has arrived, China is on course to overtake the euro area in the size of its economy this year. China’s gross domestic product is forecast to reach about $13.2 trillion in 2018, beating the $12.8 trillion combined total of the 19 countries that use the euro, according to data compiled by Bloomberg. In 2017, the euro cohort edged China by less than $200 billion. “It’ll overtake and then persist,” said David Mann, Singapore-based global chief economist for Standard Chartered Bank. “It’s a function of the economic system, institutional infrastructure, education and hard infrastructure — all of which have been moving in Asia’s favor.” Asia — including powerhouses Japan and India as well fast-emerging emerging nations such as the Philippines and Indonesia — already crowded out the combined economies of North and South America in 2016, according to data compiled by Bloomberg. And the faster average growth pace in Asia is set to be a boon to that yawning gap for many years. China’s leaders, convening in Beijing for the National People’s Congress, have doubled down on President Xi Jinping’s ability to keep growth stable, having removed the limit on his rule. The world’s second-biggest economy is weathering a gradual slowdown as Xi tries to manage a shift from the low-wage, high-exports model of the past to a more balanced mix where stronger domestic spending plays a greater role. To do so, China faces numerous challenges. It will have to manage ballooning debt, financial markets need to open to global investors, and the government will have to adjust to a rapidly aging population. The UN projects that a quarter of its residents will be over 60 by 2030. China should grow at a pace of at least 6 percent for the rest of this decade and keep up a 5 to 5.5 percent rate throughout the 2020s, Mann projected. He said it’s hard to argue that growth in the euro area would be much above 2 percent for the next couple of decades.