Almost Every Country in Expansion Mode

The robust health of the global economy has received significant press coverage in recent months. Beneath the headlines, there are a number of key trends that reinforce an optimistic view. The post-financial crisis cycle is morphing into a new phase of broader, more investment-led growth, which is reinforced by a resumption of expanding international trade.

After years of the global economy being beset by rolling economic crises, the breadth of economic growth conditions today is a welcome change. Survey data shows that almost every country is seeing expansion, a rare occurrence even from before the crisis. Broad growth is now intertwined in a virtuous cycle with rising trade volumes. Global exports are now up 5% from a year ago, and global container volumes are also up 7%, both increases are the fastest since 2011, David Stubbs wrote for Forbes Middle East.

Another encouraging aspect of the current growth is the fact that it is accompanied by elevated levels of consumer and business confidence. This more positive view of the world is starting to have real economic impacts.

Estimates of global capital spending (excluding China) show growth in investment volumes of close to 7% on an annual basis, a significant pick up from recent years. This holds out the tantalizing prospect that the drivers of this expansion are shifting from consumer purchases fueled by low interest rates, such as cars and homes, to investment by businesses into productive capital. This would have several positive implications for the economic cycle, and hence for investors in the Middle East who are exposed to it.

 Business Sentiment

After all, business investment tends to be more trade-heavy than government or consumer investment, helping perpetuate and reinforce that virtuous cycle of growth and trade demand. Both investment and trade are correlated with productivity growth, the return of which would be a major positive for markets and investors.

One sector that has been a drag on economy-wide business investment, has been in the commodities and basic materials sector. After a more than 40% decline from its peak in 2013, investment in those sectors by listed companies stabilized this summer. This stabilization reflects in part the improvement of the health of balance sheets amongst listed companies, but also the grind higher in the price of most commodities in the past year.

The Middle East is an obvious beneficiary of that trend, but any relief delivered by global markets should not halt the drive towards economic and investment diversification across the region. Certainly, the international investment opportunities are still apparent for those investors looking beyond home markets.

As labor markets tighten, countries are either going to get inflation, increased labor force participation or faster productivity growth. It will probably be a combination of all three, but which one dominates will determine the future of the cycle. A sustained rise in inflation will likely pressure central banks to exit their supportive policies faster than currently envisioned, with significant consequences for asset markets.

On the other hand, if recent signs of productivity pick up are sustained, then estimations about the remaining duration of the cycle will have to be expanded. For now, the shifting drivers of this economic cycle are an encouragement to stay invested, whilst waiting to see how the next phase plays out.

  Growth Faster in 2018

The global economy is enjoying a strong and broad-based recovery, and will grow even faster in 2018, but there are still risks that need attention, according to International Monetary Fund Chief Christine Lagarde.

In an exclusive interview during a two-day visit to Singapore, Lagarde pointed out that about 75% of the world economy is now growing. Moreover, the drivers of the recovery are “not only the usual suspects of domestic consumption and trade, but also investment—which had been lagging for many years”.

However, Lagarde added that concerns remain about the 40-odd countries that are not participating in the global recovery, most of them in sub-Saharan Africa. “We also need to be concerned about growth potential, which is certainly lower than we would like to see,” she said, “and that has to do with productivity issues—productivity is still quite low.”

In its latest World Economic Outlook report released last month, the IMF raised its forecasts for global economic growth to 3.6% this year and 3.7% in 2018, compared with 3.2% in 2016.