International Economic Week In Review: Global Growth Is Still Weak And Getting Weaker

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Includes: ACWI, ADRU, CHN, CN, CXSE, DBEU, DBEZ, DEZU, DGT, EEA, EPV, EURL, EZU, FCA, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, FIGY, FIHD, FXI, FXP, GCH, GLQ, GSEU, GXC, HACW, HEDJ, HEZU, HFEZ, HFXE, HGEU, IEIL, IEUR, IEV, JFC, MCHI, PGJ, PTEU, RFEU, RGRO, RWV, SBEU, TDF, UPV, VGK, VT, WBIL, XPP, YANG, YAO, YINN, YXI
by: Hale Stewart

The post-recession global economic environment has been plagued by a combination of crisis and controversial policy responses. The potential for a "Grexit" in 2012 took the EU to the edge of calamity, while the current possibility of a "Brexit" is slowing UK growth. China's declining commodity demand slowed non-OECD countries' growth. And few governments engaged in meaningful fiscal stimulus, forcing central banks to perform the economic heavy lifting. The combination of these events caused slow global growth since the end of the recession. And if the OECD's recent analysis is correct, we can expect more of the same for the next 12-24 months.

One of the report's overarching themes is that growth is plagued with "weak demand." Aggregate global aggregate demand is simply GDP: consumption + investment + government spending + net exports. Policymakers' primary goal is to shift the demand curve to the right, as shown in this chart:

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Unfortunately, the pace of the rightward shifting has been disappointing:

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Average world GDP growth for 2003-2012 was 4%. But growth decreased for the last 3 years and is currently 25% below its previous average. More disturbing, this is occurring 7-8 years after the end of the recession. More concerning is non-OECD growth which is not only 45% below its previous average but is also decreasing. While the reasons for this drop are known (diminished Chinese commodity demand caused lower commodity prices which lowered GDP growth), the end result is concerning nonetheless. Finally, the OECD is projecting that in 2017 - nearly 10 years after the end of the recession - there will still be a global output gap of 1%.

One of the biggest contributors to demand weakness is OECD labor market slack:

Greece's and Spain's U-6 unemployment rate (incorporating part-time workers who want to work full-time, and inactive persons wanting to work (but not actively seeking a job)) is over 30%, while Portugal's and Italy's level is greater than 20%. Most concerning is that of the 16 countries charted, only 3 have a U6 rate less than their U3 rate. This development has led to weaker than desired wage growth, which, in turn, decreases consumer demand.

Lower consumer demand leads to lower investment:

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The red portion of the column represents capital investment, which is meaningfully lower since the end of the recession. Business investment is a variable in the macro-level demand equation.

Global trade weakness transmits these developments between countries:

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The top chart - from the IMF's April document titled, "Too Slow for Too Long" - shows that since 2012, trade volumes have decreased by ~50% for both the OECD and developing world. The bottom chart explains that the Russian and Brazilian depression are the primary causes. But regardless of where the slowdown is occurring, it's having an overall negative impact on global GDP.

At this point, we get into a "chicken and egg" discussion: does weak consumer demand drive capital investment, or does capital investment create jobs increasing growth and thereby demand? Let's leave that for another day. The point is that, after 8 years of economic expansion, the global economy can't attain that elusive "escape velocity" speed where it's no longer in need of governmental or central bank stimulus. Worst of all, there's been slow but continual degradation of growth since the beginning of the year which is not abating. All three major global groups (OECD, IMF, World Bank) have not only highlighted this slowdown but have also argued for additional governmental measures. Unfortunately, so far no one is either listening or agreeing to take more definitive action.

Hale Stewart, XE.com