Wednesday, 20 of June of 2018

Economics. Explained.  

Global Growth is on the Rise

May 12, 2017

Because the U.S. is the world’s largest economy U.S. residents tend to focus almost exclusively on the domestic economy.   But in today’s increasingly global environment what happens elsewhere matters.  The IMF believes that global growth will quicken from 3.1% last year to 3.5% in 2017 and that growth pickup is not attributable solely to the United States.  That means that central banks can begin to wean themselves away from the uber-easy monetary policy that has provided life support for the global economy during the past eight years and return to a more “normal” economic environment.  Here is a quick look at non-U.S. countries that are experiencing faster GDP growth.

GDP growth rates for our neighbors to the north and south, Canada and Mexico, are moving in opposite directions.

Canada.  The U.S. and Canadian economies are closely intertwined.  To the extent that the U.S. economy is getting a lift from the expectation of lower individual and corporate taxes, repatriation of overseas corporate earnings, and abatement from needlessly complex federal regulations, that helps the Canadian economy as well.  But the Canadian economy is also highly dependent upon exports of commodities.  Rising prices for both oil and non-fuel commodities provides a further lift to the Canadian economy.  The IMF projects GDP growth in Canada of 1.9% in 2017 compared to 1.4% last year.

Mexico.  Like Canada, Mexico typically benefits from faster U.S. growth.   However, Trump’s comments earlier this year about pulling the U.S. out of NAFTA and uncertainty about U.S. immigration policy have soured relations between the two countries.  As a result, the IMF anticipates that GDP growth in Mexico will slip from 2.3% in 2016 to 1.7% this year.

Latin America.  Like Mexico, most countries in Central and South America are concerned about President Trump’s trade and immigration policies which are weighing heavily on both confidence and growth expectations throughout the region.

The situation in Brazil, the region’s largest economy by far, is different.  That country is poised to end its 2-year long recession.  Rising oil prices have contributed to the rebound.  But, equally important, in January the Brazilian Senate ended a year-long impeachment process by removing from office President Dilma Rousseff who was embroiled in the scandal at the Brazilian national petroleum company, Petrobras.    Hopefully, this development will enhance the government’s ability to implement policy and strengthen the emerging economic upswing.

Europe.  European economic growth is accelerating.  European Central Bank Chairman Draghi noted this week that euro area GDP growth, which had been stuck in a range from 0.3-0.8% for 15 consecutive quarters, picked up to 1.7% last year and should repeat that growth rate in 2017.  The unemployment rate in the Euro area is the lowest it has been since May 2009.  There are numerous success stories.

Spain.  The Spanish economy plunged into recession in 2007-2008.  The situation continued to deteriorate and the economy suffered a financial crisis in 2012 that required a bailout package from the E.U.  But the Spanish economy has recovered vigorously.  Following 3.2% and 3.1% GDP growth rates in 2015 and 2016, the Spanish economy is poised to expand at a solid 2.5% pace this year.  That is a dramatic turnaround in a surprisingly short period of time.

Germany.  The economic data for Germany accelerated in the first quarter, but the YPO Global Pulse measure of CEO confidence in Germany surged in April.  That probably had more to do with the victory by Angela Merkel’s CDU party in the Saarland state’s election in March.  Her party’s 5-seat gain in that election increased her chances of victory in the federal election in September.

United Kingdom.  The government revised up its GDP forecast for this year by 0.6% from 1.4% to 2.0%.  Meanwhile, the unemployment rate dipped to 4.7% the lowest rate since 1975.

France.  The YPO Global Pulse confidence measure for France plunged 8 points in April as CEO’s got a case of the jitters ahead of the French presidential election.  But with the overwhelming victory by centrist leader Emmanuel Macron the possibility of France leaving the European Union has disappeared.  Hopefully Macron will be able to ease some of the currently stifling labor laws in that country and bring down the 10% unemployment rate.

Asia.  As the world’s second largest economy China gets most of the attention when economists discuss Asia.  But, in this case, growth in China is expected to be relatively steady at about 6.5% this year and slow gradually towards the 6.0% mark in the years ahead.  Thus far fear of Trump’s protectionist policies directed at China have not dampened growth expectations by any particular amount but they remain a concern.

India.  The real growth story in Asia comes from India.  After climbing at about a 7.5% pace in 2014 and 2015, growth will slip to 6.8% in 2016 as the result of a temporary cash shortfall as the government removed high value banknotes from circulation in an effort to curb tax evasion and graft.  But GDP growth has recovered quickly and could re-attain a 7.5% pace this year.  That makes India the fastest growing economy in Asia and one of the fastest growing in the world.

Emerging Asia.  The ASEAN nations which include Indonesia, Malaysia, Singapore, Thailand, the Philippines and Vietnam amongst others will benefit from rising commodity prices, but any resurgence in growth amongst those countries will be kept in check by the gradual growth slowdown in China which is their primary trading partner.

Conclusion.  Following Trump’s election last November the possibility of tax cuts, repatriation of corporate earnings, and relief from a stifling regulatory environment have rekindled growth expectations in the United States.  That same tendency is evident in many countries in Europe, Asia, and Latin America.  At the same time fears of rising nationalism have been dealt a series of blows in the wake of elections in Austria, the Netherlands, Germany, and France.  As those fears shrink into the background the gradual pickup in global economic activity should become more apparent.

Stephen Slifer


Charleston, S.C.

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