Rare Synchronized Growth Upswing to Power Through Soft Patch
(Bloomberg) -- The rare synchronized upswing of the global economy is looking down but not out.
What’s happening, economists say, is that the broadest period of world growth since 2010 is peaking at an elevated level, not petering out. And the driver of the expansion is shifting to a fiscally juiced U.S. economy from a slowing Europe and Japan.
But they acknowledge that their forecasts of another year or more of solid economic activity have become more uncertain after a soggy start to 2018, an outbreak of trade tensions and a ratcheting up of concern over Syria.
“If you had talked to me two months ago, I would have said there are upside risks,” to global growth, said Ethan Harris, head of global economics research at Bank of America Merrill Lynch in New York. “Now I’m seeing downside risks.”
Central bankers and finance ministers are emphasizing the positive as they prepare to gather next week in Washington for meetings of the International Monetary Fund.
Both Federal Reserve Chairman Jerome Powell and European Central Bank President Mario Draghi delivered upbeat economic assessments in recent days, suggesting they’ll push ahead with plans to scale back monetary stimulus.
That’s not to say that everything’s copacetic. Citigroup Inc. calculates data in major economies are undershooting forecasts by the most since last June with its measure for the euro zone the weakest in almost six years. JPMorgan Chase & Co.’s composite index of manufacturing and services worldwide hit a 16-month low in March.
“For the first time in a year we’re talking about a challenge to our view” of strong, synchronized growth, said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.
Australia’s central bank said Friday that international investors are under-pricing the risk of an economic shock that could alter the outlook for financial markets.
Add in a raft of exogenous risks, including a potential U.S.-China trade war, and it’s no wonder investors are worried.
Yet all the sturm und drang hasn’t forced economists to materially mark down their forecasts. They see the world economy expanding 3.7 percent this year and next, in line with 2017’s out-turn, according to a Bloomberg survey this month. Goldman Sachs Group Inc. is penciling in 4.1 percent for 2018.
“Fed tightening, trade tensions, and China deleveraging all threaten to drag on growth, and some of the latest signs point to softness creeping in,” said Tom Orlik, chief economist for Bloomberg Economics. “So far though the main story for the global economy in 2018 is one of remarkable resilience.”
One reason for continued optimism is that some of the first quarter weakness was due to harsh weather. “A couple of months of some soft data in the wintertime in Europe and the U.S. is not meaningful,” said Allen Sinai, president of Decision Economics Inc. in New York.
What’s more, the tariffs being discussed by the U.S. and China just aren’t large enough to make a meaningful impact on an $80 trillion world economy. Deutsche Bank economists reckon that a limited conflict could lop just 0.2 percent from each countries’ gross domestic product.
Most importantly, though, the underpinnings are sound.
Workers are starting to benefit from the tightest labor market in years in Germany, Japan and the U.S., where take-home pay is also rising thanks to tax cuts.
U.S. tax breaks are boosting U.S. companies’ finances as well, encouraging them to spend more on factories and equipment. In fact, capital outlays are increasing worldwide as corporations increasingly put rising profits to work.
“Investment growth may be turning a corner” after years of lagging behind, Ben May, director of global macro research for Oxford Economics in London, wrote in an April 3 report.
In China, the stronger capital spending should help offset the drag on growth from industrial consolidation and economic reforms, said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong.
Monetary policy also remains easy across the world and even after their recent wobble, financial markets remain a positive impulse for growth in the U.S., according to Goldman Sachs economists.
Not ‘Overly Concerned’
“There have been negative surprises, but we’re not that overly concerned,” said Goldman Sachs economist Jari Stehn. “The bottom line is that the global growth numbers have moderated, but we’re not rolling over as much as some of the data suggest.”
That’s assuming all goes to plan.
IMF Managing Director Christine Lagarde this week warned that the trade spat could snowball into something much worse, damaging confidence and investment. Bloomberg Economics reckons a full-blown trade war could wipe $470 billion off global gross domestic product, the size of Thailand’s output.
Perhaps the biggest risk is a rash of self-reinforcing pessimism in which households, investors and consumers react to headlines about trade wars and softening demand by pulling in their horns and undermining their economies even more.
That’s why there’s a nagging sense of doubt, according to Janet Henry, global chief economist at HSBC Holdings Plc in London.
“Global growth has been coming off a very high level,” she told Bloomberg Television. “At this stage it’s unclear if it’s moving to a more sustainable level of growth or a more sustained downtrend.”
©2018 Bloomberg L.P.