Why global growth can overcome concerns

Was it just a seasonal effect? In spring 2018, the general mood was still optimistic: the IMF had once again raised its global economic growth forecasts for 2018 and 2019. Fast forward to a few months later at the December G20 Summit in Buenos Aires, and optimism has flown the coop to be replaced if not with pessimism, then at least with caution. So just how did we end up here? And, more importantly, is global growth really under threat?

The first major source of concern stems from emerging countries, dependent on investment flows from the rest of the world: greater investor caution, combined with Fed interest rate hikes – making US risk‑free investments more attractive – has created an environment where the most vulnerable emerging countries (those with a current account deficit, high inflation and fragile public finances) are in a prime position to see a slowdown in growth. That said, while there may be some dramatic adjustments in store for these countries, the slowdown should be much less pronounced for the global economy: the combined weight of the really vulnerable emerging countries in global imports (see chart below) is only around 5%!

The US-China trade war is a much more serious risk for the global economy: China on its own represents 10% of the world’s imports, i.e. almost as much as the United States (13%). Of course, China is still a largely “administered” economy: the authorities have already announced credit easing measures (increased refinancing for corporate loans, establishment of a credit enhancement mechanism for bonds issued by struggling companies...). What’s more, a number of fiscal measures (notably some income tax cuts for households and some companies) should boost private-sector demand. The Chinese economy may have lost steam since summer 2018, but is far from having stalled!

Lastly, the US economy is in the midst of its longest expansion since post-WWII. The ISM composite index at 62 in November has once again outshone the most pessimistic of forecasts. The unemployment rate is back to its lowest level since the late 1960s and strong wage growth is still giving solid support to consumer spending. The increase in government spendingdecided by Congress will also fuel growth in 2019 keeping again the economy above potential in 2019.

Of course, Akerlof and Shiller famously said it best (1) : economic fluctuations are not only the result of rational decisions. “Animal spirits” – to borrow an expression from J. M. Keynes – also play a key role: if the uncertainty surrounding the trade war lasts too long, companies will end up postponing their investment and hiring plans.

Let’s hope the truce reached in Buenos Aires is not just an interlude.



(1) George A. Akerlof and Robert J. Shiller (2009), Animal Spirits: How Human Psychology Drives the Economy, Ed. Pearson