For decades, the global economy has been defined by dissonan
There
has been the Japanese recession. The financial crises in the United
States and Europe. And drama in emerging markets throughout.
But
as central bankers, finance ministers and money managers descend on
Washington this week for the fall meetings of the International Monetary
Fund, they will confront an unusual reality: global markets and
economies rising in unison.
Never
mind political turmoil, populist uprisings and threats of nuclear war.
From Wall Street to Washington, economists have been upgrading their
forecasts for the global economy this year, with the consensus now
pointing to an expansion of more than 3 percent — up noticeably from 2.6
percent in 2016.
Economists
from the I.M.F. are likely to follow suit when the fund releases its
biannual report on the global economy on Tuesday.
The
rosy numbers are noteworthy. But what’s more startling is that
virtually every major developed and emerging economy is growing
simultaneously, the first time this has happened in 10 years.
“In
terms of positive cycles, it is difficult to find very many precedents
here,” said Brian Coulton, the chief economist at Fitch, the debt
ratings agency. “It is the strongest growth we have seen since 2010.”
In
Japan, a reform-minded government and aggressive action by the central
bank have pushed growth to 1.5 percent — up from 0.3 percent three years
ago.
In
Europe, strong domestic demand in Germany and robust recoveries in
countries like Spain, Portugal and Italy are expected to spur 2.2
percent growth in the eurozone. That would be more than double its
average annual growth in the previous five years.
"Aggressive
infrastructure spending by China; bold economic reforms by countries
including Brazil, Indonesia and India; and rising commodities prices
(helping countries such as Russia) have spurred growth in emerging
markets.
And
in the United States, despite doubts about President Trump’s ability to
pass a major tax bill, the economy and financial markets chug along.
In
fact, one of the few large economies not following an upward path is
Britain, whose pending exit from the European Union is taking a toll.
Having grown at an average annual pace of just over 2 percent from 2012
to 2016, the British economy is expanding just 1.5 percent this year.
Still,
the good news may result in some backslapping this week for policy
makers and regulators more accustomed in recent years to putting out
financial fires than basking in improved economic well-being.
“The
meetings will celebrate this period of synchronized economic growth and
calm financial markets,” said Mohamed A. El-Erian, chief economic
adviser to the fund giant Allianz.
There are plenty of reasons to hold off on uncorking the Champagne.
Wage gains have been slow in coming.
And most experts think the current sweet spot of positive growth, low
inflation and accommodating central bank policies could be fleeting. Mr.
El-Erian, for example, said he was nervous about several possibilities:
that global growth could taper off; that prices of stocks, bonds and
other financial assets are unsustainably high; and, most important, that
markets might not be prepared when central banks reverse their efforts
to stimulate economies by keeping interest rates low and buying huge
sums of assets.
But
for the time being, investors, economists and policy officials point to
a growing quantity of data that highlight the power of this recent
burst of economic growth.
Business sentiment in Japan and Europe is at 10-year highs. And last month, manufacturing activity in the United States
hit its highest level in 13 years.
A
big driver for growth in emerging markets, said Mr. Coulton, the
economist at Fitch, has been Chinese imports, which are up more than 10
percent this year. China is the world’s largest consumer of raw
materials such as oil, steel and copper, and it is increasingly buying
them from emerging economies.
Global
portfolio managers like Rajiv Jain of GQG Partners, who oversees $9
billion, have been quick to capitalize, snapping up shares of Russian
banks and French construction companies.
“The global economy looks pretty darn good,” Mr. Jain said.
But
with interest rates still historically low, investors have been pushing
into even riskier assets, including the bonds of emerging-market
economies, to eke out returns.
Some
countries are taking advantage of the frenzy by issuing more debt.
Argentina recently sold so-called century bonds, which don’t come due
for 100 years. Jordan and Ukraine issued government bonds that mature in
30 years and 15 years, respectively.
Susan
Lund, an expert on global financial trends at the McKinsey Global
Institute, said these types of investments from global asset managers
tended to be longer term — and thus less destabilizing — than the
so-called hot money from commercial banks that contributed to recent
debt crises in the United States and Europe.
Are things getting too hot? “We
are in a boom today, but we should not forget that the financial system
is still relatively unstable,” said Jim Reid, a credit strategist at
Deutsche Bank.
Mr. Reid, who spices up his market analyses
by regaling clients with pop songs on the piano, recently published a
detailed study on what he expects will be the causes of the next global financial crisis.
Pick
your poison: an abrupt slowdown in China, the rise of populism, debt
problems in Japan or an ugly outcome to Britain’s move to leave the
European Union.
His
overriding worry, though, is that investors and policy makers aren’t
prepared for what will happen when global central banks put a halt to
their easy-money policies
Since
the 2008 crisis, Mr. Reid noted, central banks have accumulated more
than $14 trillion in assets — an amount that exceeds the annual output
of China by $3 trillion.
What happens when the central banks all start to sell?
“This is unprecedented,” Mr. Reid said. “And no one knows what the outcome will be.”
Note EU-Digest: Could this be the calm before the storm, as political and social unrest starts peaking? It seems very familiar based on previous recessions.
