Is the world economy staging a comeback?
While there are enough reasons to feel better now, let's wait before popping the champagne cork
The world economic picture has not looked so rosy for quite some years. The update of the World Economic Outlook published at the beginning of the week forecasts a solid 3.5 per cent global growth for this year, and 3.6 per cent for 2018. Most significant in the International Monetary Fund (IMF) analysis is the picture of China, the Euro Zone and Japan forging ahead – respectively at 6.7 per cent, 1.9 per cent, and 1.3 per cent – and each of them at a stronger momentum than anticipated at the beginning of the year. The forecast for India is unchanged at 7.2 per cent for this fiscal year. Their performance is thus able to offset the slower growth than previously forecast for the US – down from 2.3 per cent to 2.1 per cent – and the UK down from 2 per cent to 1.7 per cent.
A positive element in this overall picture is that domestic consumption is supporting the growth momentum in Europe as well as in China and Japan, while all indicators point to stronger business confidence in Europe and Japan. Another one is the fact that global trade volume is expected to grow this year by 2.4 per cent — up from the 1.3 per cent growth of 2016.
Looking at the US and the UK, there is nothing to be surprised about the downward forecast of the IMF. One had to expect the negative impact of a weaker pound on the purchasing power of British consumers, while the uncertainties surrounding the modalities of the Brexit process were bound to have a dampening impact on economic activity and on overall investment. However, the UK will be doing economically as well as France this year and much better than Italy.
In the US, it was wishful thinking to expect that the tax reform and the huge investments in infrastructure promised by President Donald Trump, which contributed to generate a mood of exuberant optimism in the business community, would materialise in 2017. We are now back to reality. The sour political mood in Washington, the dysfunctionality of the Trump administration, the permanent distraction created by the endless affairs about the presumed collusion between the Trump campaign and Russian outfits during the presidential election, guarantee that no significant reform or boost to the economy will happen this year. For the time being, we can forget about the US getting back to a sustained growth rate of 3 per cent as promised by the candidate Trump.
Of course, it remains to be seen whether the IMF forecast for this year’s global growth will be vindicated come December. The IMF has always erred on the side of optimism in its forecasts. The potential for major disruptions on the world economic scene does exist. In that respect, there is no underestimating the risks to the global economy that the political context in Washington is creating. It is in the areas of trade and foreign economic policy that a US president has the greatest ability to operate and make decisions without needing the assent of the Congress. A Donald Trump increasingly frustrated by the realisation that he cannot govern the US as he used to run his company, feeling the pressure of the ever inquisitive investigation about the links between his campaign and Russia, might well be tempted to try to change the narrative to regain the control of events by initiating some protectionist measures to show his electoral base that he is true to his promises of protecting US jobs and getting a “fair” bargain from US’ partners.
In that respect, there is no shortage of targets for the White House, the first one being of course China with its huge trade surplus with the US. The fact that the Chinese leadership is steadfast in its goal of building a “socialist market economy” is bound to generate a permanent potential for frictions – as China weighs more heavily on the global scene – with the US and Europe, whose economies operate according to a different logic. Steel is today a major bone of contention with China, with the US now also bringing the element of national security in its drive for limiting the Chinese imports to the US. Wait for the next moment when solar panels or semiconductors will be the focus of new frictions. This is not to mention the “Made in China 2025” initiative launched by Beijing which aims at making China a major player in the 10 sectors on the commanding heights of the 21st century economy, and which has the potential to put it on a collision course with the US and Europe.
However, the Trump risk is not the only factor to consider. It would be a mistake to think that the populist impulse has now been tamed in Europe because Marine Le Pen was defeated by Emmanuel Macron in the French presidential election or because the far right party did not get into the government in Holland. This impulse is very much there and the European governments are fully aware of it, adjusting their policies to take this element into account. Suffice to look at the economic nationalism displayed by President Macron whose program of reforms will be put to a severe test this autumn as it remains to be seen whether the French president will be able at the same time to make painful reforms while sticking to his promise to respect the 3 per cent of gross domestic product (GDP) threshold for fiscal deficit.
In Europe also, the latest ^17-billion bailout of two Italian banks in June is a reminder that the European banking sector – while in better shape than two or three years ago – still has vulnerabilities that need correction. In a different domain, while not ignoring the capacity of Beijing to firewall and manage it, one cannot ignore the significant increase of financial risks in the Chinese economy, a risk that could spread outside of China if only because of the huge wave of foreign acquisitions by Chinese companies — the financial soundness and governance of some of these companies are now being put into question.
Last but not the least the two big question marks continue to hang over the global economy: One is linked to the stubbornly low inflation rates that the US, Europe, and Japan are facing despite the loosest monetary policies ever put in place. The second is related to the way the Federal Reserve in the US will continue to move on its interest rates policy and how and when the European Central Bank will decide that it can put an end to its Quantitative Easing.
Indeed, there are some good reasons to feel better today about the world economy than has been the case for too many years. But let’s wait a little bit before popping the champagne cork.