Global Growth Divergences
Five years after the global financial crisis and about a year after the global risks stemming from the
European debt crisis were meaningfully reduced, growth and economic policies are being driven less
by global forces and more by country-specific influences. On a global basis, growth has been stable
and average for some time, levels of activity are roughly normal and inflation rates are low. However,
differences in where various countries are in their respective long-term debt cycles, as well as how
policy makers are reacting to their circumstances are producing meaningfully different economic
outcomes. Economic conditions and policy responses to those conditions in the developed world are
meaningfully divergent. In the emerging world, while there are also differences among countries and
regions, there has been a broad slowing of growth. And for the first time in about ten years growth in
EM countries relative to potential is now lower than it is in the developed world. Below we walk
through these conditions (on a more granular basis).
• In the US we are seeing a gradual normalization of conditions as the cyclical expansion continues
and private sector debt burdens have been reduced. Since the onset of fiscal tightening earlier
this year the US economy has slowed a bit, but we expect US growth rates to accelerate once the
fiscal drag ebbs later this year which should put the Fed in a position to begin gradually reducing
stimulation.
• Euroland economic growth is about zero after contracting for a year and a half. Financial
conditions have improved .materially since Draghi's July comments and imbalances have been
reduced as periphery economies have made significant structural adjustments in recent years.
Still, with the exception of Germany the level of economic activity in Euroland remains depressed
and isn't likely to improve much without additional monetary 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. There has been a sharp
rise in domestic spending over the last few months and confidence has popped as well, but
Japan is at a much earlier stage in its recovery than the'US. Policy makers may have to do more
to sustain the expansion and appear ready to do so.
• Chinese growth has cooled visibly in recent months, but remains near potential and the level of
economic activity remains high. Growth in China has also become more reliant on credit growth
than earlier in the expansion. The slowdown in Chinese growth is having a meaningful negative
impact on many trading partners and has been a drag on both commodity prices and commodity
producers.
• Over the past couple of years, growth in the emerging world ex-China has been weaker than in
any period over the past decade with the. exception of the financial crisis. That slowdown has
occurred as a result of weak demand for EM exports in the developed world and China and to a
lesser extent from weaker EM competitiveness. Most of these countries have moved towards
easier monetary and fiscal policy of late and have the ability to ease further to stimulate growth if
necessary.
For most of the last 10 years, emerging market growth has been stronger than developed world
growth even after accounting for relative differences in productivity. In other words, emerging
economies had been consistently growing faster relative to potential than developed economies but
now, for the first time in a decade (excluding the temporary spike during the financial crisis), this is no
longer the case. Currently, developed economies are outperforming emerging economies, though
the difference is not particularly large and the stronger growth relative to potential in the developed
world is taking place in the context of more depressed levels of activity.
Along with divergent growth rates, ongoing divergences in output levels remain substantial across the
developed and emerging worlds (both within and between regions). In most of the developed world
there are low levels of activity, though even within the developed world there are meaningful
differences. The level of activity in some countries, like the US, has recovered meaningfully, while
conditions remain more depressed across most of the rest of the developed world (particularly in
Europe). In the emerging world, many economies saw a robust recovery and a return to normal
levels of activity within only a couple of years following the financial crisis. Among them, China
stands out as it's been operating at a high level of activity for some years after recovering very
strongly following the financial crisis. And for much of the rest of the emerging world, slower growth
relative to potential in recent years has led to a gradual deterioration in levels of activity such that
levels of activity are roughly neutral right now across the emerging world ex-China.
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