Global growth in 2017 was characterised by synchronised expansion by the world’s major economies. This was largely because robust global trade growth created a rising tide that lifted all boats.
Since global trade has waned in 2018, economic growth has become less coordinated. While China, Europe and Japan have all seen their growth rates cool, the US economy continues to power ahead.
Prospects for re-convergence?
One of the key differences between the US and the other economies mentioned has been the US’s ability to maintain strong domestic growth at a time when external demand has been slowing. China, Europe and Japan benefited from the revival in global trade that happened in 2017 but since this has reversed, they have lost a key engine of growth and have not been able to offset this with domestic growth.
In the US, government tax and spending policies designed to boost growth have supported robust domestic demand by lifting consumption and government spending. In this respect President Trump's fiscal largesse could be seen as coming at just the right time; switching on the boosters just as the economy was beginning to fade.
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The outlook for global trade looks challenging as forward-looking indicators, such as the global purchasing managers’ index (PMI) of export orders, point to a further deceleration in the coming months. New export orders are an indicator of future trade activity. It therefore seems unlikely that a resurgence in global trade will be responsible for any re-convergence in global growth.
Taking a leaf from the Trump playbook
What may prove more effective this time around is if governments follow Trump’s lead on the fiscal (tax and spending) policy front, something we are already seeing happening.
China recently announced tax cuts and there is talk of more to come in terms of auto sales, VAT and corporation tax reductions. In Europe, German fiscal policy is set to be more expansionary next year, Italy has revealed fiscal policy aimed at enhancing growth and the UK is relaxing its budget too. Meanwhile, Japan has announced a supplementary budget and there are discussions on how to offset the impact of the higher consumption tax in 2019 such as spending more on pre-school education and other measures.
Going forward we think we will see more governments stepping in to support growth with tax and spending measures, particularly as central banks are now focused on normalising monetary policy. For investors, this would mark a profound shift from the traditional support offered by the central bank to something less flexible and more dependent on the complexities of politics.