Half full? Dare we say three-quarters?

Sure, there are still reasons for pessimism, but what do we make of all the signs that the global economy is picking up strength? Go with it
By Ian McGugan

Look! Over there—could that be sunrise on the horizon? It certainly seems so. After years of struggling through the long shadows cast by the financial crisis, the world economy is brightening. Maybe, just maybe, managers should stop worrying about the next disaster and prepare for a patch of prosperity.

A bevy of indicators buttress the case for optimism. Beginning last fall, the Citigroup Economic Surprise Index rose strongly into positive territory (see chart), indicating that readouts were coming in better than forecasters had hoped. China’s economy swelled at an impressive 6% clip, Capital Economics estimated. The euro zone, a problem child ever since the financial crisis, expanded at the fastest pace in six years during the early months of 2017, according to surveys of purchasing managers.

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The good news continued on this continent, where the United States kept on churning out new jobs at a healthy clip and neared what most economists consider full employment. Meanwhile, Canada’s gross domestic product surged past expectations in January, leading Douglas Porter, chief economist with BMO Financial Group, to predict that our home and native land will outpace the U.S. in economic growth during 2017.

The sheer number of encouraging readings suggests that the world is finally emerging from the crisis of 2007-2008. “After a lackluster outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies,” the International Monetary Fund said in its January update.

It’s not entirely clear what’s driving this encouraging trend. One candidate is simply time. The noted economists Carmen Reinhart and Ken Rogoff estimated in their study of past financial crises that it takes six to eight years from the end of such a calamity for an economy to fully recover. Perhaps we’re witnessing a natural process of healing.

If so, that’s a great change for a world economy that has struggled to get much traction post-crisis. Over the past few years, at least one major country was always disappointing expectations or raising concerns. At various points, the U.S., or China, or the euro zone sputtered. Now, finally, all the major economies are firing in tandem.

Oddly enough, this global upturn is happening at exactly the same time as populist politicians are winning elections based on the premise that the global economy is failing. As a result, it’s politics that loom as the biggest short-term threat to further prosperity. In the U.S., Donald Trump’s erratic agenda could translate into major trade conflicts. In Europe, the French election in April has the potential to throw additional strain on the already shaky euro zone. Negotiations over Brexit could also be a havoc-maker.

To be fair, though, politicians aren’t the only headwind for growth. Aging populations are also acting as a drag on much of the developed world. This greying trend has been going on for years but is now picking up speed and exerting an unmistakable impact on society.

As baby boomers retire in droves, the number of prime-age workers has essentially stopped growing in Canada and the U.S. A lack of new workers makes it difficult for economies to expand rapidly, especially since recent gains in productivity have been nothing to brag about. One of the foremost researchers in the area, John Fernald of the Federal Reserve Bank of San Francisco, reckons that the long-term potential growth rate of the U.S. is now only 1.6% a year, a level that would have been considered feeble, even sickly, a couple of decades ago.

For that reason, among others, “the potential for disappointments [in the global economy] is high,” the IMF warns. Its caution reflects the discouraging experience of the past few years, when periods of solid growth consistently dissolved into soggier patches.

But, despite the official wariness, there are also substantial reasons to think this outburst of growth has a fighting chance to persist longer than its recent predecessors. For one thing, oil prices are low. So are interest rates. Cheap energy and cheap borrowing costs continue to provide a solid foundation for further economic expansion.

In addition, China’s leadership continues to be in a mood to stimulate its economy and that has helped to strengthen commodity prices, boosting the outlook for producers of raw materials. As the U.S. labour market tightens, the odds rise of a virtuous circle—one where stronger consumer spending will spur more business investment, encouraging even more employment, and so on.

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The IMF’s guess—and mine, for what it’s worth—is that this year and next will turn out be good for Canada and the U.S., but only in the contemporary sense of what constitutes “good.” That is to say, we’ll see growth of 1.9% to 2.5% a year—solid, but substantially less than what used to constitute boom times (see chart). The limited supply of new workers and generally disappointing gains in productivity make it tough to see how we can achieve the light-speed growth that populist politicians love to promise. It’s highly probable, though, that we’ll collectively do okay, or even a bit better than okay, as a tight labour market in the U.S. boosts wages as well as demand for Canadian products.

Canadian companies should enjoy the good times. They should also keep in mind that the world is changing. In the years after the financial crisis, staying close to home was a fine idea. Canada and, more recently, the U.S. were havens in a slow-growth world. But things are now shifting: aging populations and uncertain politics are ratcheting up risks in North America. In Canada, a housing bubble and high levels of consumer debt add to the potential dangers.

The IMF argues that it will be the emerging economies, particularly in Asia, that will lead the world in growth over the next few years. Farsighted Canadian companies may want to start shifting their attention to those parts of the globe and away from a North American economy that is doing fine just now, but looking increasingly risky.

Ian McGugan is an award-winning business journalist in Toronto and the founding editor of MoneySense magazine. E-mail: imcgugan4@gmail.com.

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