For the past few years, the global economy has been oscillating between periods of acceleration (when growth is positive and strengthening) and periods of deceleration (when growth is positive but weakening). After more than a year of acceleration, is the world heading towards another slowdown, or will the recovery persist?
The current upswing in growth and equity markets has been going strong since the summer of 2016. Despite a brief hiccup after the Brexit vote, the acceleration endured not only Donald Trump’s election as US president but the heightening policy uncertainty and geopolitical chaos that he has generated. In response to this apparent resilience, the International Monetary Fund, which in recent years had characterised global growth as the “new mediocre”, upgraded its World Economic Outlook in July.
Will the recent growth spurt continue over the next few years? Or is the world experiencing a temporary cyclical upswing that will soon be subdued by new tail risks, such as those that have triggered other slowdowns in recent years? It is enough to recall the summer of 2015 and early 2016, when investors’ fears of a Chinese hard landing, an excessively fast exit from zero policy rates by the US Federal Reserve, a stall in US GDP growth and low oil prices conspired to undercut growth.
One can envision three possible scenarios for the global economy in the next three years or so. In the bullish scenario, the world’s four largest, systemically important economies – China, the eurozone, Japan and the US – implement structural reforms that increase potential growth and address financial vulnerabilities. By ensuring that the cyclical upswing is associated with stronger potential and actual growth, such efforts would produce robust GDP growth, low but moderately rising inflation and relative financial stability for many more years. US and global equity markets would reach new heights, justified by stronger fundamentals.
In the bearish scenario, the opposite happens: the world’s major economies fail to implement structural reforms that raise potential growth. Rather than using the national congress of the Chinese Communist party this month as a catalyst for reform, China kicks the can down the road, continuing on a path of excessive leverage and overcapacity. The eurozone fails to achieve greater integration, while political constraints limit national policymakers’ ability to implement growth-enhancing structural reforms. And Japan remains stuck on its low-growth trajectory, as supply-side reforms and trade liberalisation – the third “arrow” of Shinzo Abe’s economic strategy – fizzle out.
Will world growth continue – or are we heading for a slowdown? | Nouriel Roubini
October 11, 2017 by Leave a Comment