WSJ: The World’s Economies Are Growing in Rare Harmony
Yellen's 2013 taper tantrum acted as a synchronized brake i the world. It could not go on forever. It now impossible to do like Paul Volcker during Reagan years. Jack up interest rates to double digits and send the emerging markets on a decade long recession. What happened during the Asian Meltdown of 1997-98? also not possible. Why? The rest of the world had too much FOREX reserves. All repressed demand is being unlocked all at once.
The World’s Economies Are Growing in Rare Harmony
Synchronized expansions tend to be self-reinforcing—and they can have staying power
More than 85% of the world’s nations increased their exports last year, the highest share of nations to do so on record, according to the IMF.PHOTO: EPA/SHUTTERSTOCK
By Josh Zumbrun
Updated Jan. 22, 2018 4:31 p.m. ET
The International Monetary Fund estimates that the world’s seven biggest economies—the U.S., China, Germany, Japan, France, the U.K. and India—each grew more than 1.5% in 2017. That kind of synchronicity is uncommon, and it might set the world economy up for more solid growth in 2018.
It might sound surprising because it has been nearly a decade since the world’s economy began growing again following the global financial crisis. But rather than petering out—or succumbing to forces of protectionism and nationalism, as many had feared a year ago—economies around the world gained strength in 2017 and appear poised to strengthen a bit further.
Economic data for 2018 already shows some of that strength. The JPMorgan Chase and IHS Markit global purchasing managers index this month was the strongest it has been in nearly seven years. Official industrial production gauges are also near their strongest levels since early 2011, showing a global economy that’s getting a second wind.
“Global manufacturing output is booming,” says David Hensley, director of Global Economic Coordination at JPMorgan. “The acceleration in output has been very broad-based by region and sector, powered by impressive gains in global retail sales and capital expenditures.”
The phenomenon of globally synchronized economic growth became apparent in 2017 when a number of large commodity-producing nations emerged from recessions caused largely by the collapse of oil prices. As commodity prices bottomed out, those nations found their footing.
Moreover, no major economies stumbled into recession in 2017, leading to the remarkable situation where all 45 major economies tracked by the Organization for Economic Cooperation and Development were growing at the same time, for the first time since the global financial crisis.
U.S. growth was stronger in 2017 than in 2016, and record levels reached by U.S. equity indexes suggest a bright future to investors. Forecasters in The Wall Street Journal’s monthly survey of economists place just a 13% chance on a recession occurring in the next year, the lowest estimate since mid-2015 when U.S. consumers were benefiting from lower oil prices.
Global equity indexes have roared upward in the past year. The Global Dow Index, which tracks 150 of the world’s leading companies, was up 26% over a one-year period through Jan. 19, while the Dow Jones Industrial Average of 30 U.S. blue chips was up 31%.
But despite U.S. market strength, the biggest surprise in recent months for growth has been the eurozone, which appears to have surpassed the growth rate of the U.S. last year, although final numbers have not yet been released. The OECD estimates that the eurozone grew 2.4% in 2017, compared with 2.2% growth for the U.S. in the same period.
While the numbers are not huge in historical terms, their stability is mutually reinforcing.
“The U.S. expanding causes European exports to strengthen, causes their economy to strengthen, which feeds back and leads to higher demand for our exports,” said Jay Bryson, global economist for Wells Fargo Securities. “For the U.S. that effect is relatively small, but for other countries, those feedbacks on a global basis can be very, very important.”
Indeed, synchronized economic expansions, like the one we’re in now, tend to be self-reinforcing. And they can carry on for extended periods.
According to the IMF’s latest estimate, among 176 countries for which it gathers data, 150 managed to increase their exports last year. That means more than 85% of the world’s nations increased their exporting last year, the highest share of nations on record.
The previous times all the world’s economies got in sync tended to last for several years. From 2004 to 2007, all the world’s major economies were growing; that was also the case for several years in the late 1980s. Of course those booms ended—and badly in the 2000s—but not before posting a series of strong years globally. The global economy grew at about 4% a year from 1984 to 1989 and again from 2004 to 2007.
“Assuming the geopolitics don’t turn nasty, I would think the expansion probably continues” for at least a couple more years, Mr. Bryson says.
An extended period of synchronized growth helps, but it won’t solve all the world’s economic challenges. In addition to geopolitical risks, such as trade wars, actual wars and a turn toward more nationalist policies, many governments around the world are carrying unprecedented debt burdens. Aging populations and slowing productivity growth have raised questions about whether the world’s nations have the potential to grow all that much faster.
From 2012 to 2016 the global economy grew only about 2.5% a year, according to World Bank data. That pace rose to 3% in 2017 and is expected to climb a bit further in 2018, reaching the highest level in seven years.
“When you have a global recession, you can’t export your way out,” says Ayhan Kose, director of the World Bank’s division that produces economic forecasts. By contrast, a country that started to stumble now could turn to nearly any trading partner for a boost. ”This creates its own momentum, feeding its own cycle.”
Mr. Zumbrun is a national economics correspondent for The Wall Street Journal in Washington. He can be reached at josh.zambrun@wsj.com. |
