Ten years after the financial crisis began, the global economy is finally showing signs of pushing out of a sustained low-growth phase.
None of the major economic regions are booming. Instead, current global momentum is being lifted by modest, but widespread, advances in growth.
This was clearly evident from the latest semi-annual prognosis on the global economy from the IMF (International Monetary Fund), out this week.
Global growth in real GDP (gross domestic product) for 2017 is forecast at 3.6%, improving to 3.7% in 2018. These represented upgrades from 3.5% and 3.6% previously in the IMF’s April forecast. This is a modest improvement, but is significant relative to the 3.2% outcome for 2016, and to the general trend from the IMF in recent years of downgraded projections.
A 3.7% growth outcome for 2018 would be the strongest since 2011, and would mean global growth sneaked back above its average since 1980.
Sitting behind the current improvement, the IMF noted that “notable pickups in investment, trade, and industrial production, coupled with strengthening business and consumer confidence, are supporting the recovery”.
In terms of regional composition, 2017 would be the first year since 2010 when global growth was improving in all four major economic blocs. 2018 projections see a continued improvement in the US and Emerging Markets outweighing slightly lower growth in Europe and China.
Despite the lower level of growth, the huge and increasing size of China’s economy means that it still contributes more to global growth than any other country – in 2016 it accounted for roughly a third of the total 3.2% growth globally, almost the same as all advanced economies combined. Even by 2022, with projected growth below 6%, China would account for a quarter of the growth in the world economy, again bigger than all advanced economies put together.
While we would agree that medium term growth prospects in China are still positive, at Milford we would also emphasise it as a key region of vulnerability for the global economy, given the ongoing increase in leverage within the Chinese economy.
Looking briefly at inflation, global inflation is expecting to rise in 2017, driven by the increase in commodity prices from last year. Projections remain for low inflation in coming years, averaging 3.3% globally across five forecast years until 2022, compared to an 11.5% average in the past 30 years. Within this, the outlook for advanced economy inflation, in the IMF’s view, is similarly low, with 2% forecast in the next 5 years, compared to 3.4% in the past 30.
This lift in economic growth is a key reason why markets have continued to make strong gains in the face of ongoing political noise, particularly regarding the Trump administration in the US. The market is taking the view, at least for now, that this improvement in global growth is a more important driver of company profits than a clearly dysfunctional White House.
At Milford, we agree with this prognosis and have been increasing our allocation to global shares over recent quarters.
Of course, we continue to watch for any particular catalysts that could lead to political risks having a meaningful negative impact on growth. These risks are not only to the downside, however, as we saw with the French election earlier this year. Most notably, the prospect of a change in the US President – seen as an even chance before the end of his first term in betting markets – would be one outcome that we believe markets would cheer.