It is time to be more optimistic about the global economy
Worries about the global economy loomed large in the Bank of England’s latest Inflation Report. The words “global” and “world” featured 88 times in the document and 20 times in the accompanying set of minutes. Global economic weakness is one of the key reasons why the Monetary Policy Committee (MPC) is reluctant to raise interest rates. But do the arguments stack up?
The MPC is right to be focused on the global economy. All the big shocks that have hit the UK economy since the 1990s have originated abroad.
Just after the MPC was established in 1997, the Asian crisis rocked the world economy. This was followed by the dotcom boom and bust in the late 1990s and early 2000s – driven by the US. Global political instability was the main concern in the early part of the 21st century, following 9/11 and subsequent wars in Afghanistan and Iraq. Then, surging oil and commodity prices took over in the mid-2000s. In 2008/9 we suffered the biggest global shock of them all – the financial crisis – which had its roots in sub-prime lending in the US housing market.
But the outlook for the world economy is not as unfavourable as Bank of England Governor Mark Carney suggested on Thursday. Here are some positives which should become more apparent as we move through the year.
First, a low oil price is generally good for economic growth. Countries which are net consumers of oil are much more important to the global economy than net oil exporters.
Net oil exporters, who produce more crude than they consume, account for around $5 trillion of global GDP. The top 10 net oil importers, including the US, major European economies, Japan, China and India, account for nearly $50 trillion of world GDP – 10 times as much.
Here in the UK, we can see the economic benefits of a low oil price – with petrol and diesel prices below £1 a litre. This is being replicated around the world, providing consumers with more money to spend on other things. The last time such a big fall in the oil price occurred was in the mid-1980s, and it was followed by a massive consumer boom.
The impact on global growth should be very positive this time around, too.
Second, Europe is emerging out of the doldrums. Two large EU economies – France and Italy – are still struggling, but the rest – including eastern Europe – are growing reasonably well. This was confirmed in revent European unemployment figures. Across the EU, the jobless rate is the lowest since 2009; and in the eurozone, it is the lowest since 2011.
2016 is set to be the strongest year for European growth since the financial crisis. The improving outlook for the continent is reflected in a strengthening euro against the dollar and the pound. The euro has risen above $1.10 this week and sterling has recently dropped below €1.30 for the first time since early 2015.
Third, the US economy – our biggest export market outside Europe – continues to grow steadily. GDP figures for the final quarter of last year were disappointing, but jobs growth towards the end of 2015 was strong. Unemployment has fallen to an eightyear low of 4.9pc, compared with an average since 1990 of more than 6pc.
The IMF’s forecast for US GDP growth in 2016 and 2017 growth is 2.6pc – considerably stronger than the average growth of just over 2pc since the financial crisis. This is very respectable growth for a major Western economy in the “New Normal” since the financial crisis.
Fourth, growth is continuing in the emerging market economies of Asia, Africa and Latin America, even though there has been a major slowdown over the past two to three years.
According to the Bank of England’s Inflation Report, both overall emerging market growth and the growth of the Chinese economy has been very much in line with their projections three months ago.
There are weak spots in emerging markets, driven by falls in commodity prices and political instability. Four emerging market economies are in recession – Russia, Brazil, Taiwan and Venezuela. But these countries account for just 2.5pc of total UK goods exports.
There is a lot of economic strength and growth potential in the rest of the global economy.
Other sources of data suggest that the world is doing better than the Bank of England’s assessment suggests. UK exports of goods rose a healthy 5pc in the past year. Air travel – a good barometer of the health of the global economy – is growing strongly. International air travel in 2015 was up 6.5pc on the previous year, which is above-trend growth. In addition, a recent report from Dr Rebecca Harding, of Equant-Analytics, suggests that $2 trillion of world trade is not being captured in the official statistics. So some trade and GDP growth may not have shown up in the data.
What does all this mean for the British economy? The Bank of England’s Inflation Report gave a downbeat assessment for growth, reducing its forecast for 2016. I am not convinced. We have heard about global headwinds consistently from the Bank since the financial crisis, yet the UK economy has continued to grow consistently and unemployment has fallen from more than 8pc to around 5pc.
Growth may look disappointing compared to the glory days before the 2008/9 recession, but that is an unrealistic benchmark. We now know that strong growth in the decade to 2007 was the product of an unsustainable expansion in credit and debt worldwide.
Current Bank of England concerns about the weakness of global growth are overdone. Our major markets in Europe and the rest of the world are still performing well, while domestic spending is healthy. Consumers are benefiting from low inflation and investment spending has been resilient.
Which raises the question of why the Bank of England is so reluctant to raise interest rates, as the US has done? The weakness in the world economy is not a good reason for inaction.
There is a lot of economic strength and growth potential in the rest of the global economy