There’s bullish talk about a coming pick-up in global economic growth, but for the moment, the signals are negative. Trends in the global economy look increasingly ominous.
Global Economic Growth
Global trade is sluggish. In the first four months of the year, it rose only 2 per cent in volume terms, fell 12 per cent in dollar terms, year-on-year. Exports of Asian countries that are particularly sensitive indicators are looking awful.
Investment in expanding productive capacity is weak. The gap between new orders and stocks held by manufacturers is the poorest in three years.
Inflation is trending downwards in the US, Europe, China and Japan, with the rise in consumer prices in purchasing-power terms down over the past two years from 3 per cent to 1.2 per cent.
The OECD – the think-tank of mature economies – has cut its forecast for growth this year from 3.7 per cent to 3.1. The US is only expected to grow 1.1 per cent according to the Atlanta Fed’s latest GDPNow model. Europe and Japan are forecast to deliver minimal growth, while the most dynamic constituent of the world economy, China, is losing momentum.
Of course, there are some positive factors to counter the gloom. The fall in oil prices, by improving users’ spending power, is adding 0.25 percentage points to economic growth. Central banks show no sign of retreating from their extreme money and credit creation policies to stimulate growth. In the US unemployment continues to fall, wage gains have started to gain traction, the housing market is looking better.
But nevertheless, the world economy, on balance, remains stuck in what the OECD calls “low-level equilibrium.” Two years ago in On Target, I forecast: “Global economic growth is going to remain weak for many years to come.”
My friend, London analyst David Fuller, counters this view, arguing that what we’re experiencing “is no more than a typically slow recovery following a credit-crisis recession more severe than any seen since the 1930s.”
Deflation isn’t necessarily a bad thing if it’s produced by accelerating technological innovation; the American economy has not lost growth momentum despite the cessation of quantitative easing; the dollar has been strong; several other central banks have now followed the US with QE policies; Treasury bond yields have had their strongest rally since 2013.
I hope his optimism will be rewarded. But I remain unconvinced. Falling economic growth rates and worsening disinflation are not encouraging signs.
Why has global recovery been so sluggish?
The most important reasons are…
- Poor growth in demand.
Consumers aren’t able to deliver the buoyant spending that has been a key driver of economic growth in the past because they’re not earning more, nor are they able or willing to go deeper into personal debt.
There is little or no growth in the incomes of most of the workers in the mature economies because of a combination of adverse factors such as competition from cheap foreign labour, job destruction by infotech, labour laws that discourage job creation, a shift in demand towards higher-level skills and attitudes, and an abundance of unemployed available for the lower-level jobs.
Governments no longer have the fire-power to boost demand by spending more because they are already spending too much (often on the wrong things), thanks to decades of expanding state entitlements without responsible financing. Poor economic growth has boosted the burden of those entitlements while depressing tax revenues. High and still-rising levels of public debt increase voter hostility to greater borrowing to finance stimulus measures.
Businesses lack the confidence to invest in aggressive expansion as they have in the past. The credit crisis has shocked managements into much more cautious policies.They require less uncertainty about the future when considering new projects. Greater priority is given to hoarding cash, distributing immediate rewards through buybacks and dividends, strengthening balance sheets, and seeking growth through mergers and acquisitions rather than building new plants or creating new businesses.
copyright: Martin Spring of OnTarget
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