(Reuters) - If the world becoming less economically integrated, someone is going to have to explain why growth around the world is so remarkably consistent and tightly correlated.
It isn’t just that all 45 OECD countries are growing together for the first time since 2007, but that the level of growth around the world is as similar as its been in a long time. Growth levels among the Group of 10 wealthy nations are as tightly clustered - meaning rates of growth are similar - since at least 1991, and among 21 countries, large European Union countries’ growth figures are as tightly packed as they’ve been since at least 1997.
It also isn’t that growth is particularly rapid: the IMF is forecasting 3.5 percent, an improvement on last year’s 3.1 percent and well below the kinds of figures that usually prevailed in the last century. But wherever this tide is coming from, it is truly lifting all boats.
That’s remarkable for a number of reasons. There has been a widespread expectation that a period of de-globalization in which the world became less tightly knit would be part of the bitter fruit of the great financial crisis.
That idea is partly borne out by trade and financing statistics, as well as some striking political realities. The world’s most powerful man, Donald Trump, is an economic nationalist who at least talks the talk of capturing more of the pie rather than growing it through greater integration. At the same time, Britain, one of the principal leaders, for good or ill, of globalization over the past several hundred years is in the process of ham-handedly attempting to work out its divorce from the European Union.
Yet here we are, despite disparate demographic pressures and slowly rising U.S. interest rates, with virtually the entire planet in synchrony.
“The key theme in the financial world is the remarkably synchronous economic recovery across different regions and sectors, with muted inflationary pressures: not only are most parts of the world growing, but the dispersion in economic performances is remarkably low, compared to history,” Stephen Jen of hedge fund SLJ Capital wrote to clients.
Jen argues that this is in part the result of China’s new eminence.
“For the first time since China became big enough to be considered the ‘second sun in our solar system,’ its growth has been in synch with that of the U.S. If both the U.S. and China enjoy strong expansions, it would be difficult for any economy not to enjoy the growth beta,” he writes.
ANOTHER GREAT MODERATION?
One of the supposedly discredited theories popular before the financial crisis was the idea of the “Great Moderation,” a new predictability in U.S. economic growth supposedly produced by better fiscal and monetary management. While the global economy did erupt violently in the last decade, a 2014 research piece from the Federal Reserve concluded that low economic volatility would become the norm, punctuated by periods of high volatility. (here)
It may be that the coordinated growth globally is the result of the relative uniformity of supportive monetary policies put into place and more or less maintained since the crisis. On that view it is possible that a change of gears by one important central bank or another might upset things, perhaps if the Fed actually carries through with normalizing interest rates.
It is also possible that synchronized monetary policy is supporting growth even as the process of de-globalization gathers steam. De-globalization isn’t just the result of destructive populist urges; part of the argument was that individual nations needed better control over the financial systems, which they backstopped with their taxes, but which were highly inter-related.
There is good evidence that globalization is slowing, if not reversing. Global trade is forecast to grow about 2.4 percent this year, well below overall economic growth. Between 1950 and 2008, global trade grew at three times the rate of the global economy, reflecting the post-war expansion and the eventual integration of China and the Soviet bloc.
Cross-border claims among banks, another good indicator of economic globalization, have oscillated at around zero percent growth for much of the post-crisis period, a stark contrast to their previous robust expansion.
Can the great moderation in globally synchronized growth last? For a time, yes, but as with the great moderation in the United States, volatility may in the end have been suppressed, and not extinguished, by policy.
(James Saft is a Reuters columnist. The opinions expressed are his own)
Editing by Dan Grebler
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