In case you haven’t noticed, things have changed.
We are witnessing a global growth upswing that we have not experienced in several years.
In previous years, growth was very meager. Some countries were in or near economic recession. Corporate earnings were dropping in many regions, including in the US.
But growth – of the more powerful, globally-synchronized kind – is back. The OECD is now forecasting that the global expansion will accelerate this year and next, to 3.5% and 3.7%, respectively, the fastest pace since 2011. In addition, for the first time since 2007, all 46 countries monitored by the OECD are on track to grow this year. In contrast to previous years, when growth forecasts were downgraded as we advanced throughout the year, in recent months, growth expectations have been continuously upgraded.
The big change occurred outside the US. American economic activity has not improved much recently (the US has been fairly stable throughout. Although earnings are now growing again, which is an improvement). We are seeing big improvements in Europe, emerging markets and Japan. Emerging markets, for example, have really struggled in recent years. With many of them still dependent on exporting commodities, the commodities slump of the past 5-6 years had hurt them badly.
Improved global economic momentum is supportive of growth-oriented financial assets. During 2015/2016, while growth was slow and earnings were dropping, their prices were held up mainly by very accommodative monetary policy, ‘easy money’ – an unhealthy and risky situation. The change in the driving force behind financial asset prices, which started around the last quarter of 2016, did not occur due to the election of Trump (in contrast, perhaps, to popular perception), but rather due to the above positive change in the global economic environment.
Many people have not noticed that we have moved into a different economic environment. They are assuming we are still experiencing the same economic conditions as 3-4 years ago. This may be a case of inertia of thought. But things have changed. We are now enjoying synchronized global growth – something we have not had for several years.
Isaac Newton’s First Law of Motion focuses on inertia. It is often stated as: An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force. For those in a state of inertia of thought, I hope this little note serves as such a force.