It has been an underwhelming three months for global economic growth. The rebound in the second quarter of the year from a very poor Q1 was hindered by a weaker than expected recovery in the US economy, a far greater than anticipated slowdown/downturn in much of emerging market Asia outside of China, and even deeper recessions in Brazil and Russia.
Hopes of good global growth in the second half of the year rely on the acceleration in the developed world and China achieving its “official” growth target. Although some uptick in emerging market growth momentum is expected, particularly in Asia, the risk that global growth will not reach the 3.1% forecast is growing.
Indeed, hopes as the quarter began that Q2 growth in developed and emerging markets would accelerate to annualised growth of around 2.7% and 3.6% respectively have been dashed with latest forecasts now below 2% and 3%.
Even as the news from consumer sectors has generally improved, manufacturing output has stagnated driven by sizeable falls in Japan, Asia Pacific ex China and India and many commodity producing countries. Even so, the US and UK reported trend-like underlying growth, the euro area is also expected to do so while China surprised positively. Overall, GDP growth in Q2 is expected to be a little above last quarter’s very weak 2%.
What Next for Global Growth?
Led by stronger consumption growth, it is anticipated Japan will join the other main developed economies in recording trend/above trend growth over the balance of the year. Predictions for second half DM growth range between 2 .25- 2.5%, but to achieve this will require the US to sustain at least a 2.5% p.a. quarterly growth rate.
A substantial pick-up in growth is also generally forecast for EM but at this stage there is considerable guesswork and little fact.
The widening divergence in growth momentum between DM and EM has long been recognized as a key global macro theme and predictions of an H2 acceleration in global growth are even more reliant on a rebounding US economy. Hopefully the US is at last moving towards sustainable expansion, with wage growth joining job gains as a further support to consumption. It is also essential the euro area and Japan continue their gradual recoveries principally due to more competitive currencies, the effects of aggressive monetary policy easing, lower energy costs, and, in the case of Japan, stronger real wage growth. It is also essential that further monetary easing and government spending boosts the Chinese economy as the slowdown elsewhere in EM is greatly adding to growth uncertainties.
What are the Risks?
The Chinese economy remains the key concern and it will require further (expected) support from the authorities to sustain the current pace of growth. China is also home to some of the largest ever economic and financial bubbles and the stock market crash only adds to concerns.
Slowing growth throughout much of Asia and worries over feedback loops, while the Russian and Brazilian recessions are deepening and extending.
It is expected that Grexit will return as an issue while the US Federal Reserve is expected to raise rates this year, followed in time by the UK’s Bank of England.
There are risks that financial markets could undermine the economic rebound, as well as possible secular stagnation across developed markets.
