Why 2017 is Not 2012-16
The last five years are unlikely to be a good guide for what will unfold next in the global economy
Over the last five years, the global economy has been through a number of wobbles. Initially, developed markets (DMs) faced unprecedented deleveraging headwinds. Subsequently, China and other emerging markets (EMs) underwent a period of deep adjustment.
The outcome was a global expansion that was un-synchronous and heavily dependent on policy stimulus, which has been reflected in years of below-par growth. From 2012 to 2016, global GDP growth has averaged just 3.3% a year and, more recently, since 2014 Q2, global GDP growth has averaged just 3.2% a year, well below the long-term average of 3.5%.
Fast forward to today, global growth is tracking at its fastest pace since 2014 Q2. The growth has been broadbased, with upside surprises in Europe and China. While some moderation in growth in the second half of 2017 is expected, full-year global GDP growth is estimated at 3.6%, which would be the strongest rate of growth since 2011. Moreover, global growth is tracking better than what we have built in for the full year (2017), principally due to a stronger-than-expected out-turn in Q2.
There are a number of factors that differentiate this year. First, both DM and EM growths are accelerating for the first time since 2010. Within that, the recovery has been broad-based across individual economies too. Second, global trade in value and volume terms is at its strongest since 2011.
Third, the global investment cycle has improved meaningfully, as global ex-China gross fixed capital formation grew at the fastest pace in 2017 Q1 since 2015 Q1 in annual percentage terms and in a broad-based fashion.
Finally, while the strength of the recovery is similar to that of 2010-11, the recovery was, to a large extent, driven by base effects and was, therefore, somewhat statistical in nature as it reflected a recovery from a deep recession, that recovery driven by aggressive monetary and fiscal expansion in both DMs and EMs. When evaluated against this context, global growth is currently tracking at the best rate since the 2003-06 cycle.
Sharp Slowdown Ahead?
Despite the recent strength in global growth, there is still a fair bit of scepticism. The three key debates are:
Will tightening by DM central banks cause a sharp slowdown? Investors contend that the recent subdued inflation prints are pointing towards some weakness in aggregate demand, and the planned removal of monetary accommodation by DM central banks will hurt the recovery.
However, private sector risk attitudes are normalising, as deleveraging pressures are now behind us. Indeed, within G4, the non-financial private sector has been leveraging up for the last four quarters. Fiscal policy is not tightening, as it was between 2011and 2015. As the private sector takes on a greater role in driving growth, monetaryaccommodationcanbegradually rolled back without causing a sharp slowdown in growth.
Will a weakening of credit impulse in China weigh heavily on growth? Investors are concerned that with policymakers now dialling back the stimulus, growth would decelerate sharply, as it did during 2013-15.
There are three offsets to this policy tightening. First, external demand is recovering and the contribution of net exports to growth has turned positive. Policymakers in China — who tend to run a countercyclical growth model — are relying less on debt-fuelled public investment demand, which is resulting in a paring back of aggregate credit growth.
Moreover, private sector investment and private consumption are improving, which is lending support to the ongoing recovery. In the property market, inventory levels have been declining rapidly. Even though property purchase restrictions have been tightened, the property market is unlikely to require, or experience, that depth of adjustment it experienced during 2013-15.
Is recovery in emerging markets ex-China (EMXC) just about commodity price improvement and China? As China withdraws its stimulus and commodity prices reverse, growth in EMXC will decelerate. But the recovery underway in EMXC is not just about commodity prices. Indeed, both commodity exporters and importers have had a recovery in growth. More fundamentally, the majority of EMXC have had to undergo a period of adjustment (payback), as they had pursued unproductive expansionary policies post-2009, which resulted in elevated macro stability risks. This adjustment is now completed in most of these EMs. Hence, a gradual recovery is now underway.
Risks to Growth
To be sure, there are still risks to global growth, particularly in DMs as they are more advanced in the business cycle. If DM central banks were to tighten even more aggressively than we are building in, it could weigh on growth. In China, we are watching risks to growth that could emerge if policymakers take up more aggressive tightening from 2017 Q4 post the 19th Party Congress.
Our base case is that global growth will moderate somewhat in the coming quarters from the current high run rate, but will settle on average at above trend for both 2017 and 2018. In other words, the experience of the last five years is unlikely to be a good guide for what will unfold next in the global economy.
The writer is global co-head of economics, Morgan Stanley
It’s got cloudy