Global growth undoubtedly slowed last year, as an uncertain outlook for global trade led to manufacturing recessions in several major economies. However, the industrial slowdown has not yet fed through to the wider economy and Fathom’s Leading Indicator (FLI) suggests a brighter outlook for the New Year.
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While there were one or two dicey moments for the global economy over the past ten years, policymakers will undoubtedly be relieved to have avoided a repeat of the previous decade’s financial crisis. That being said, the scars are yet to fully heal, with the crisis having caused a permanent hit to GDP per capita of almost 20%.
The decade began with a debt crisis in the euro area that saw investors fear for the solvency of many sovereigns in the periphery, with Greece still flirting with the idea of Grexit as recently as 2015. Around that time, investors also recognised that the slowdown in China was worse than previously feared, with Fathom’s China Momentum Indicator falling below 2%. 2016 saw the election of Donald Trump and the start of a prolonged period of trade uncertainty. Despite all these headwinds, the global expansion has continued, even if the pace of that expansion was slower than hoped.
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The recovery has remained fragile and monetary policy has thus far failed to move away from the effective lower bound with low rates not proving to be the quick fix that had been hoped for ten years ago. In fact, Fathom analysis suggests that persistently low interest rates could prevent the process of creative destruction, thus lowering productivity and harming the supply side of an economy.
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Looking ahead, Fathom expects trend growth to be lower still in the 2020s than it was in the 2010s. This reflects continued weak productivity growth and a further deterioration in the demographic backdrop, with the size of the working-age population set to decline in many economies. There will of course be peaks and troughs with some countries (most notably Germany, Japan and the UK) likely to see growth substantially below trend this year. For China, by some metrics now the world’s largest economy, the ultimate fate is likely to be Japanification and we continue expect the economy to slow in the coming quarters, before policy stimulus can kick in. With growth in most countries unlikely to exceed trend and technological change arguably leading to a flattening of some firms’ marginal cost curves, neither higher inflation nor higher rates are likely to be the defining features of the 2020s.
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