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At the start of 2018, recent economic data from poor and rich countries alike suggest people should forget the phrase ‘secular stagnation’ and embrace ‘global growth’. The latest indicators show the world economy expanding rapidly, in unison and creating the largest sustained upward surprise in the outlook since the boom years of 2004 to 2007.
For the first year since 2010, all of the Group of 20 leading economies expanded in 2017 and growth is accelerating in most. Upward revisions are now the order of the day and in the Autumn of 2017, the IMF improved its global forecast for the following year for the first time since 2009. It is set to revise the outlook for 2018 growth even higher than its current 3.7 per cent figure at the start of the World Economic Forum in Davos.
These buoyant trends are plain to see in the latest “nowcasts” which seek to demonstrate the level of activity in the global economy faster than economic forecasters. The recent economic data points to strong or accelerating growth in the US, the eurozone, Japan, Canada, China, Russia, Mexico, South Korea and South Africa, according to Now-casting.com. Among large economies, only the UK and Brazil are losing momentum.
Fulcrum Asset Management estimates the world started 2018 growing at an annualised pace of 5 per cent with emerging economies above their long-run sustainable growth rates and the US, eurozone and Japan far above recent averages.
“Spring has sprung in the global economy,” says Holger Schmieding, chief economist of Berenberg Bank. “After seven years of unusually restrained economic growth, the chill has eased.”
Financial markets have reacted accordingly. Further buoyed by the prospect of higher profits after the US corporate tax cuts, the MSCI world index of equity prices rose 21.4 per cent in the year to the second week of January, repeatedly hitting new highs.
The question for this buoyant economic outlook mixed with financial market strength is whether it is set fair. Will 2018 be the start of a stronger period of global economic performance or is it already the late cycle exuberance before another crunching halt?
There are certainly some reasons for feeling optimistic about the 2018 outlook. The spread of growth is more even rather than concentrated among one or two momentary superstar economies and advanced economies are back in the game. Highlighting the spread of growth back to its traditional engines, PwC, the professional services company, expects 70 per cent of global growth this year to come from the US, emerging Asia and the eurozone, compared with 60 per cent on average since 2000.
Barret Kupelian, a senior economist at PwC, said: “We expect global economic growth to be broadly based in 2018, rather than dependent on a few star performers”.
With world inflation is expected to be stable and below target in most advanced economies, there is little reason for central bankers to tighten policy quickly, preventing households from increasing their spending. Oxford Economics expects the spending power of consumers to accelerate around the world as employment grows, energy bills stabilise and cheaper borrowing in some emerging economies.
And with unemployment still high in the eurozone and underemployment still a problem in the US, the cyclical upswing of the global economy appears to have more than one year of life left in it.
But the longer term health of the global economy — the difference between a couple of good years and a sustained improvement — depends on securing a rise in productivity growth rates that allow faster growth to persist even at full employment.
There is little evidence yet to suggest the global productivity weakness has ended and, although investment growth rates are climbing higher again, they still have a long way to go to reach the levels thought normal before the global financial crisis. Long-term government bond yields also remain close to their levels a year ago, suggesting financial markets do not yet see more than a global cyclical upswing.
There are, of course, even risks to this short-term upbeat global outlook which most economic forecasters are predicting. Inflation might prove to be closer to a tipping point than generally thought, requiring central banks to end the party early. This would create stress in asset prices, which have become used to gorging on cheap money and easy credit.
Even if central bankers seek to keep the party rocking, stock markets might well fall from their high perches, sensing the outlook is not quite as rosy as predicted. And one trigger for such action could be geopolitical tensions coming to the fore either with trade or armed conflicts.
But the predominant mood at the start of the year is excitement rather than fear. While policymakers never think there is a good time to be complacent, they can enter 2018 knowing many of the economic problems they have fought for years have been vanquished. That is before they need to start grappling with new ones that will arise.
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