Bridgewater Daily Observations
Global Growth Divergences
We are now about five years past the global financial crisis, and while global growth rates and levels of activity are fairly normal in aggregate, differences in policy choices as well as where various countries are in their respective long-term debt cycles continue to produce meaningfully different economic outcomes:
• In the US, private sector conditions are gradually normalizing as balance sheets continue to heal. Growth is above potential, levels of activity have improved substantially, and inflation remains stable and average. As the fiscal drag fades later this year, the Fed may be able to start gradually pulling back stimulation.
• Japan has been stuck in an ugly deflationary deleveraging for 20 years, but recent monetary and fiscal policy shifts may finally allow Japan to break its deflationary cycle. Growth has recently accelerated and policy makers appear ready to do more if needed.
• Euroland has been contracting for a year and a half, though there has been some recent improvement as acute financial pressures have eased. Levels of activity remain depressed and inflation is both low and falling. Economic conditions in Euroland remain weak enough to justify additional stimulation.
• Chinese growth accelerated meaningfully late last year in the context of already elevated levels of activity, which (along with the bounce in the US) helped support aggregate global growth. More recently, Chinese growth has moderated some and is now close to potential.
• Growth in the rest of the emerging world has slowed relative to earlier in the current expansion despite a high degree of stimulation. EM central banks are in a position to ease further if necessary, and households are in a position to respond given their relatively low debt burdens.