The Long View – Don’t Panic Yet, Global Growth Is Still Strong
Many observers believe the global economy is about to shift into recession. Recent numbers from Germany, for example, support this view.
However, although it is sage to acknowledge the undeniable logic of cyclical pressures, this pessimism is being overplayed, especially as the United States has been outperforming the eurozone and Japan with 4.2% gross domestic product (GDP) growth in this year’s second quarter, growth primarily driven by consumer spending.
A US recession is almost certainly not on the near-term horizon, given the momentum kickstarted by last year’s $1.5 trillion tax cut, deregulation and ongoing deficit spending.
Instead, continued positive momentum for the next 18–24 months is likely. It’s no surprise to see Eurozone growth soften slightly this year.
After all, last year’s GDP growth of 2.4% was the eurozone’s fastest since 2007. It even outshone the US economy’s 2.3% growth in 2017.
The eurozone’s projected growth trajectory of 2.5% is achievable this year, given steady consumer demand.
Confidence in the eurozone’s continued strength is partly due to Europe’s consumers.
After all, 56% of the European Union’s (EU’s) GDP growth comes from domestic consumption – impressive for a region that is renowned for export strengths.
This affords Europe a level of economic self-sufficiency that export-driven economies such as China simply don’t have.
China’s GDP decelerated to 6.7% in the second quarter of 2018, slightly behind the 6.9% it achieved in 2017.
This was deliberate. China has slowed its economy as it tries to move away from investment and export-led GDP growth toward an internal consumer-driven economy, similar to that of the EU.
China envies the self-sufficiency that the EU enjoys, and China’s private consumption has been stuck below 40% of GDP since 2005.
Another barrier to boosting consumer-led growth is that China is also cracking down on risky credit growth.
US president, Donald Trump’s trade war isn’t helping matters, either. So, something needs to give. It’s a tricky time for the Chinese.
Finally, how the markets react to the ending of quantitative easing is crucial.
The US Federal Reserve celebrated the new year in January by instituting a programme of buying massive quantities of bonds each month.
By doing this, the Fed hoped to pass along credit and more liquidity to US corporations and households in hopes of boosting growth.
The Fed is now gradually shrinking its balance sheet to “normalize” QE policy.
The Fed now allows up to $40 billion of its QE bonds to mature each month without replacing them, and up to $50 billion a month starting this month.
Because of this, ten years into a US economic surge, market volatility is hoving into view on the global horizon.
Therefore keeping an eye on inflation and the ageing credit cycle would be wise and beneficial for long-term investors.
As mentioned, taking a macro view, it looks as though US growth should continue for another 18–24 months.
Fears about inflation and trade tensions are slightly exaggerated but do require close monitoring.
Furthermore, although growth in China and the eurozone has gone a little limp recently, global growth remains buoyed by consumer spending.
Also, expect rising market volatility as more banks end quantitative easing. But, above all, long-term investors need to stay focused and alert.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
