Global Growth Wave Reverses Economic Slump
Posted January 27, 2018 1:46 p.m. EST
LONDON — A decade after the world descended into a devastating economic crisis, a key marker of revival has finally been achieved. Every major economy on Earth is expanding at once, a synchronous wave of growth that is creating jobs, lifting fortunes and tempering fears of popular discontent.
No tidy, all-encompassing narrative explains how the world has finally escaped the global downturn. The United States has been propelled by government spending unleashed during the previous administration, plus a recent $1.5 trillion shot of tax cuts. Europe has finally felt the effects of cheap money pumped out by its central bank.
In general terms, improvement owes less to some newfound wellspring of wealth than the simple fact that many of the destructive forces that felled growth have finally exhausted their potency.
The long convalescence has yielded a global recovery that is far from blistering in pace, and geopolitical risks threaten its demise. Many economists are skeptical that the benefits of growth will reach beyond the educated, affluent, politically connected class that has captured most of the spoils in many countries and left behind working people whose wages have stagnated even as jobless rates have plunged.
And still the fact that every major swath of the globe is expanding is a source of optimism. There is no guarantee that this expansion will prove more equitable. Yet if growth were to evolve, bolstering wages while adding to the security of middle-class lives, the beginning would probably feel something like now.
“The world is less reliant on a few star performers,” said Barret Kupelian, senior economist in the London office of PwC, the global accounting and consulting company. “If something bad happens in one economy, the fact that global growth is spread gives you more assurance that this is more sustainable.”
The United States, the world’s largest economy, is into its ninth year of growth, with the International Monetary Fund lifting expectations for expansion to 2.7 percent this year from 2.3 percent because of the tax cuts.
China has diminished fears of an abrupt halt to its decadeslong growth trajectory. Europe, only recently dismissed as anemic and hopelessly vexed by political dysfunction, has emerged as a growth leader. Even Japan, long synonymous with grinding decline, is expanding as well.
Rising oil prices have lifted Russia and Middle East producers, while Mexico has so far transcended fears that menacing trade rhetoric from the Trump administration would dent its economy. Brazil, still suffering the effects of a veritable depression, is flashing tentative signs of recovery.
The result is a hopeful albeit fragile recovery, one vulnerable to the increasingly unpredictable predilections of world leaders.
Threats of nuclear annihilation exchanged by President Donald Trump and the North Korean leader Kim Jong Un have sown fears. Britain’s pending departure from the European Union — known as Brexit — holds the potential to ensue absent a deal, subjecting Europe to grave uncertainty about the rules of trade especially for finance. And Trump’s on again-off again vows to tear up the North American Free Trade Agreement while unleashing a trade war with China also risk derailing growth.
“We used to operate under the idea that Western markets are politically stable, while we accepted that frontier markets were risky,” said Martin Scheepbouwer, chief executive officer of the OLX Group, which operates online classified advertising platforms in 41 countries. “Nowadays, with Brexit in Europe and the presidency in the United States, there’s a new level of instability looming over the economy. That’s something that concerns us.”
The world economy is expected to grow by 3.9 percent this year and next, up from 3.7 last year and 3.2 percent in 2016, according to the IMF. That is positive. Yet in the years before the crisis, global growth typically exceeded 4 percent.
As the World Economic Forum this past week released an assessment of risk factors featuring a survey of 1,000 experts, it found that 93 percent of respondents saw increased threat of political or economic confrontations. Some 79 percent fretted about heightened likelihood of military conflict, and 73 percent saw rising risks of an erosion of world trading rules.
The report also warned of rising economic inequality, growing threats to cybersecurity and increased incidence of extreme weather enhanced by climate change.
“Many of these risks are increasingly systemic,” said Margareta Drzeniek Hanouz, an economist at the World Economic Forum, adding that they threaten “catastrophic consequences for humanity and for the economy.”
Global businesses appear cautiously optimistic that the good times can last.
In Poland and Brazil, online job listings are growing rapidly, according to OLX, a clear indication of growth. Across Europe, real estate ads offering homes for sale have increased at more than double the pace of rental properties, another sign that people are operating with more money. The global crisis began more than a decade ago with the calamitous end of a U.S. real estate bonanza that set off a global disaster involving so-called derivatives.
As the reckoning played out from the United States to Europe to Asia, oil prices plunged, hitting Russia and the Middle East. Soybean farms in Brazil and Argentina saw orders plummet. So did mines in Australia and India and computer chip fabricators in Malaysia and South Korea.
Washington engineered swift relief, with a bank rescue and an enormous injection of credit from the Federal Reserve. But Europe prolonged the agony with bitter recriminations over who should clean up the mess.
As European governments bailed out national banks, foisting the costs on taxpayers, investors demanded higher interest rates to continue lending, raising existential questions about the euro. Not until the summer of 2012, after European Central Bank President Mario Draghi vowed to do “whatever it takes,” did the siege lift.
This year, the 19 nations that share the euro are expected to see economic growth of 1.9 percent, according to the IMF. That is not scorching. In Spain, Greece and Italy, young people still grapple with terrible rates of joblessness. Yet compared with the 4.5 percent decline in 2009 and smaller contractions in 2012 and 2013, it makes for a different era.
As recovery has spread, factories in Eastern Europe have bustled with additional orders. Auto plants in the Czech Republic, Slovakia, Poland and Romania have sent growing volumes of cars toward Germany, France and the Netherlands.
DSM, a Netherlands-based multinational company that makes nutritional products, opened a $60 million factory in Rwanda last May that is buying soy and corn from nearly 10,000 local farmers and using it to produce instant porridge.
“We are investing heavily in Asia and also in Africa because the growth of the population there is stronger,” said the company’s chief executive officer, Feike Sijbesma. “Africa, which always was the forgotten continent, is not the forgotten continent any longer.”
The reawakening of Europe combined with growth in the United States has kept Chinese industry humming to satisfy demand for goods, from auto parts to tools to clothing. More factory production has lifted prices for commodities, and increasing revenues at copper producers in Chile and Indonesia, gold mines in South Africa and silver operations in Sweden. The world is now enjoying a positive feedback loop, with growing business confidence leading to more hiring, delivering gains in consumer spending. More money in consumer pockets gives businesses more reason to expand.
“There’s basically no country in the world where the consumer is not doing well,” said Bart van Ark, chief economist at The Conference Board, a business and research association in New York.
The question now is whether new investment will materialize quickly enough to sustain expansion. Factories in Germany, France, the Netherlands, and Portugal were operating at close to full capacity at the end of last year, according to data analyzed by The Conference Board.
In the United States, investment is increasing, adding to momentum for expansion. In Europe, the growth is uneven.
The biggest concern comes from Washington, where the Trump administration has frequently vowed to punish Mexico and China for their lopsided trade balances with the United States — a step that would raise the cost of components used by U.S. factories. In a sign that such talk has moved beyond rhetoric, the Trump administration this past week slapped protective tariffs on imports of solar panels and washing machines.
“You get into a trade war, that’s the real worry,” said Ben May, a global economist at Oxford Economics in London. “The impacts on global growth would be quite severe.”