Global Recovery Expanding

The global economy is posting a strong performance with growth tracking at its fastest pace since Q2 2014. Global growth is tracking at 4.3% in Q2 and the strong pace of growth has been broad-based across both developed markets and emerging markets.

For the countries that have reported Q2 GDP data, EM economies on aggregate are experiencing the fourth quarter of acceleration in growth, while aggregate growth for the 10 DM economies that have reported data held steady at 2%, about 40 basis point stronger than the preceding five-year average pace of growth, news outlets reported.

The strength in the global recovery has extended into Q3 as well. Manufacturing PMI data, which is a timely indicator for global growth, has pointed towards continued expansion. Of the 23 countries that have reported August PMI data, the global aggregate PMI is at 54.2 in August, the highest level in the five years for which data is available. Within this group, 20 have PMI reading of above 50, indicating expansion, and 18 have a higher PMI reading in August as compared to July.

The recovery in both DMs and EMs is well-founded. DMs are now out of the deleveraging phase and risk attitudes of the private sector are normalizing. EMs are recovering having made the necessary adjustments to restore macro stability.

Growth on Track

Taken together, the global economy looks to be on track to register the strongest rate of growth since 2011 this year. Since the recovery in 2011 was driven by aggressive stimulus and reflected a recovery from a deep recession, the current global growth is actually tracking at the best since the 2003-06 cycle.

Indeed, notwithstanding some moderation in growth that is expected in the second half of 2017, economists estimate full-year global GDP growth of 3.6%, which will also mark a return of above-trend global growth.

Typically, business cycles end as central banks tighten to respond to the buildup of price or financial stability risks. The pace of monetary tightening is intrinsically linked to how central banks assess the risks to price and financial stability.

IMF Says 25% Struggling

When Christine Lagarde, the International Monetary Fund's no-nonsense boss, spoke to Harvard University this past week, she had some good news: nearly 75% of the world is experiencing an economic upswing, Reuters reported.

Why, then, was her speech given the somewhat bearish title "A Time to Repair the Roof"?

One reason is that the IMF has to worry about everyone, not just those who are doing well. If nearly 75% of world economies are growing, more than 25% are not. Some of the strugglers—not for the first time—can be found in Africa, where the two biggest economies, Nigeria and South Africa have only just crawled out of recession and could still be teetering.

The IMF's last outlook for the sub-Sahara region suggests 2017 growth of 2.6%—around a full percentage below that for the world as a whole and less than half the 1999-2008 average of 5.6%.

"The recovery is not complete," Lagarde told the Harvard audience. "Some countries are growing too slowly, and last year 47 countries experienced negative GDP growth per capita."

This brings up a second reason for Lagarde's tempered celebration of recovery—inequality.

There is no question that the gap between countries has been narrowing, as Lagarde said in her address. China, Brazil, and India, for example, are now major economic players. But within economies themselves, there are many left behind.

Most of these are the "bottom billion" described by economist Paul Collier in his 2007 book of the same name—people completely untethered to the global economy and any wealth it might bring.

But others in advanced economies—though relatively less poor—are now railing against being left behind. They range from Britain's public servants to primary school teachers in the Netherlands and nurses in parts of Australia.

The election of President Trump as United States president, Britain's vote to leave the European Union, and the rise—albeit modest—of the far right in Germany are all widely viewed as reflecting disaffection brought on by the unequal share of the global economy's spoils.

Hence, Lagarde's focus on what needs to be done right now: rich countries should spend more, central banks should communicate more clearly, and public debt needs to be brought under control.