Current global economic growth is very impressive indeed, both in its amplitude and synchronicity. In fact, every major world market has been contributing to this growth. Europe has been surprisingly strong, emerging market (EM) growth is getting deeper, Japan is growing as good as it has in years, and even the U.S., the most mature cycle in the global context, is at or above trend.
The synchronous nature of this global recovery is quickly convincing even the most deeply skeptical investors that we have finally licked the problems that have afflicted the global economy since the financial crisis of 2008. And, in my view, there is good reason to support that high level of optimism. Not only is growth higher in every part of the world, the underlying metrics such as employment, income growth, and investment are stronger on a global basis as well. Further, even the basket-case economies of the last few years, such as Brazil and Russia, are showing signs of growth and progress.
And therein lies the challenge.
Confusion: Synchronised or Secular Recovery?
Under these circumstances, it is easy to confuse a synchronised cyclical recovery for a secular recovery. If you dig a bit deeper, what happened is relatively straightforward: After the 2008 financial crisis, the recovery was quite haphazard and not synchronised. EM went on a stimulus and flow-driven binge, while large markets such as the Eurozone were dealing with their political issues. However, by 2013-14, global central bank policies were synchronised enough to create a period of decent growth.
By 2015, commodity prices had collapsed, bringing global growth down to recession-type levels, especially in places like China, and causing severe dislocations in places like Brazil, which showed massive credit growth during the good times. With China re-stimulating its economy in early 2016 and reviving the commodity cycle, the global growth picture improved and became more synchronised over time. The global economy and capital markets are reaping the benefits of that recovery today.
But the challenge for investors and, more importantly, central bank policymakers, is to recognise the large challenges in various economies – demographics, high debt levels, savings gluts, income inequality – have not been resolved. These issues and drivers will, in my view, last much longer than the current cyclical rebound.
In other words, the heart of the global economy is still enlarged and suffers from arrhythmia. It is being stabilised by the policymaking pacemaker. When things are going well, the heartbeats are synchronised and the patient – that is, the global economy – seems to be in great shape. However, the core issues are still there and the patient is likely to be on the pacemaker for a long time.
Risks of Removing the Pacemaker
If we remove the pacemaker at this point, thinking that the patient is cured, it may lead to a potentially negative outcome.
That is, if global policymakers act too soon and/or too rapidly, what looks like a synchronised global recovery can turn into an asynchronous situation quite quickly. It is therefore important for entities such as the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) to be deeply cognizant of the issues still facing the global economy. That is even more true for the politicians who appoint the members of these policymaking entities as they choose among the John Taylors, Jerome Powells and Janet Yellens of the world for potential leadership roles at these institutions.
So, what is an investor to do with all of this?
I still strongly believe that global growth is in a good place and likely to maintain this pace for a while and continue supporting the markets. This growth is being helped by policymakers on a global basis, and if those policymakers change and indicate a change in general policy direction, I would be forced to reevaluate.
In the meantime, I await President Trump’s choice for the next Fed chair with bated breath.
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