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Good Times at Last?

LONDON – In February 2017, I wrote an optimistic commentary called “The Global Economy’s Surprising Resilience.” The piece came as a surprise to those who saw only bleak prospects for Western countries, not least the United States, where US President Donald Trump had just been inaugurated.

Now, nearly a year later, my three decades of experience in global financial markets leads me to believe that the economic situation is not quite as straightforward.

On the positive side, the half-dozen cyclical indicators I listed last February remain strong, and some have even strengthened further. One key indicator is South Korea’s monthly trade data. The country’s exports grew by 15.8% in 2017, the largest increase since 1956, when it began reporting these data. Moreover, export growth occurred even as Trump threatened to withdraw from the US-Korea Free Trade Agreement and stoked tensions with North Korea – a powerful rebuke to those who have predicted retrenchment of global trade.

As I suspected a year ago, the slowdown in global trade in past years probably stemmed from the euro crisis and falling commodity prices, and would thus prove temporary. Now that those two events are behind us, global trade appears to have picked up.

Of course, much will depend on whether trade momentum can be maintained. Although South Korea’s export performance in December was impressive, it fell slightly short of forecasters’ expectations. We will have to wait and see if it remains strong in 2018.

Another key cyclical indicator is reflected in monthly Purchasing Managers’ Index (PMI) surveys for manufacturing and services, which include underlying sub-indices for inventories and sales. Here, the news is remarkable: PMI survey results in many countries around the world are the strongest they have been in years.

That includes the US, where I have found the Institute of Supply Management’s manufacturing index to be consistently accurate and indicative of underlying realities. It also includes the eurozone, where PMI-survey data have reached their highest levels since before 2000.

Even the United Kingdom’s monthly PMI surveys are showing momentum, though not as much as in other Western countries, most likely owing to the Brexit effect. If the global economic environment continues to improve, the UK might luck out in its timing for withdrawing from the European Union, notwithstanding the growth-weakening effects that Brexit will surely have.

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Crucially, key indicators for China are looking good, too, particularly in terms of long-term growth in services and domestic consumption. I continue to believe that these two factors will prove immensely consequential not just for China, but for the rest of the world as well. Many countries want to export more than just commodities and manufacturing inputs to China, and companies around the world are jockeying for access to China’s massive domestic market.

All told, forecasts projecting global GDP growth of 4% or more for 2018 seem credible. I would not be surprised to see sell-side forecasters lifting their numbers even further in the next two months. The International Monetary Fund almost certainly will at its annual spring meeting, if not sooner.

So, what’s not to like in the global economic picture for 2018? For starters, as a veteran of financial markets, I am usually wary of a strong consensus. While many oft-cited concerns in 2017 turned out to be unwarranted, that doesn’t mean economic risks have disappeared.

In contrast to a year ago, people are increasingly acknowledging that the global economy is stronger than they had thought. But if growth continues to accelerate, the US Federal Reserve might end up hiking interest rates more than markets anticipated. And the other major central banks, particularly the People’s Bank of China, the European Central Bank, and the Bank of Japan, might reverse their exceptionally loose monetary policies.

To be sure, if the global economy is truly returning to relatively high and stable growth, monetary-policy tightening need not be harmful – and may even be less harmful than waiting for stronger evidence of inflation to emerge. Nevertheless, the world’s major economies have enjoyed remarkably generous monetary policies for a decade – and for far longer in Japan’s case. At the end of the day, no one really knows what the consequences of higher interest rates will be.

For my part, I suspect that productivity growth will accelerate in a number of places, which would justify monetary-policy adjustments and make rising interest rates more tolerable. But that is just a hunch, based on my reading of tentative wage and productivity data in the UK and the US, among other places.

One final concern is that, while not having gone full circle, the global mood has shifted from fear about political risks to obliviousness, even though many such risks still loom large. The potential fallout from poor US leadership in the Middle East and on the Korean Peninsula cannot be ignored; nor can the long-term challenges still confronting Europe. I have long believed that, at least for financial investors, it is better for everyone to be worried about everything than for a small minority to be worried on everyone else’s behalf.

Still, and more important, as long as financial conditions don’t tighten excessively as a result of today’s cyclical strengthening, global economic performance for the rest of this decade could end up being more robust than anyone would have imagined just a few years ago.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Honorary Professor of Economics at Manchester University and former Chairman of the British government’s Review on Antimicrobial Resistance.

By Jim O’Neill

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