The world economy is in a pretty vulnerable position, especially after the vociferous political upheavals, such as Brexit and Trump’s victory in the US election.
Moreover, recalling the elections in France and Germany in the offing, it is quite possible that the pressure on the world economy will only grow.
However, a well-known British economist Jim O’Neill, who once created the acronym BRIC (Brazil, Russia, India, China), in his article on Project Syndicate notes that cyclical indicators point to a fairly good state of health of the global economy.
“Since my work as a chief economist of Goldman Sachs, I’ve been watching six figures from around the world, which, taken together, represent a reliable picture of how the world economy will look over the next six months. For the moment all six indicators look more encouraging than some time ago, only one of them has fallen a little from recent highs.
The first indicator is the weekly claims for unemployment in the US, which can determine the overall stability of the US economy. Properly trained economists refer to unemployment as to insufficient indicator, but the data can also be useful in predicting the nearest future.
Requirements for unemployment in the US are always relevant, since they are made on a weekly basis, and the statistics show that they are a leading indicator for the price of US stocks.
According to the last week data, unemployment claims are still quite low, and remain low for some time already, which is favorable for the US stock markets.
Similarly, the production index of the Institute for Supply Management (ISM) provides a pretty good prediction of the US economy for the next 3-6 months, even if the production is a relatively small proportion of GDP. Like the latest requirements on unemployment, the figures of ISM now give cause for optimism.
The third indicator is the subcomponent of the same survey ISM: new orders and stocks of manufacturers. Currently, new orders increase and stocks lower, indicating that the company in the coming months will have to produce more to meet these orders.
If you look outside the United States, the fourth indicator is the ratio of China’s retail spending in relation to industrial production (adjusted for inflation).
These figures give us an idea of cyclical trends and the structural change in the balance of China, from exports towards domestic consumption. Probably, it will be one of the most important indicators for China and for the rest of the global economy in the coming years.
The ratio of Chinese monthly retail sales to industrial production is yet unstable, since 2008 there was a weak growth trend, and, apparently, another surge in consumption has happened recently. That’s why I worry less than the others, about frequently mentioned risks faced by the Chinese economy.
Chinese consumer spending remains high, despite the slowdown in industrial production and investment, as well as government efforts to limit expenditure on luxury items.
Some may argue that the Chinese data cannot be trusted. But I do not understand why these relations of one of the parties will be more or less reliable than other data. Why should Chinese officials manipulate data on consumption, allowing the performance of industrial production to register a decrease. In any case, we have to work with what we have.
The fifth indicator is the data on trade in South Korea, which on the first day of each month regularly provides the results of trades – faster than any other country. South Korea has open economy and trading partners around the world, including the US, China, Japan and the European Union. Thus, its trade data can be extrapolated to draw conclusions on the state of world trade.
After a downward trend in recent years, since November, trade of South Korea has showed signs of recovery, particularly in terms of export growth, and in January it significantly stabilized. Of course, these conclusions are at odds with all the praises of globalization, which can be heard these days, and the strong protectionist administration of Donald Trump in the US today could send the global trade in the long retreat. But the latest figures of South Korea say that globalization is still showing signs of life, and that 2017 is a decent start.
In fact, except for the worst-case scenario associated with Trump, it is likely that the slowdown in world trade growth in recent years may be a temporary phenomenon.
Perhaps, this was an isolated instance that reflects a variety of factors including the euro crisis, the continued economic weakness in many European countries, a sharp decline in commodity prices, a dramatic slowdown in Brazil, Russia and other emerging economies and more stringent rules for international banks, which could hamper trade financing.
The last key indicator is the monthly Ifo business climate index in Germany, which contains the cyclic useful data for the whole Europe due to the central role of Germany in the economy of the continent. Ifo poll in recent months has presented positive results, although December data were more promising than data in January.
Together, these six indicators are telling me that the world economy would now be in the growth to index of more than 4%. This is the fastest growth for several years, although the average growth rate over the past decade of 3.3% was slightly lower than the figures in the previous decade, and close to the pace of the previous two decades.
At the same time, these six indicators cannot tell us anything about what will happen in a few months. Will the world economic growth remain strong, strengthening further, or will it begin to subside, is still an open question.
It was interesting to watch the rapid growth in terms of shocks, such as Brexit referendum in the UK and the election of Trump. And yet, it is not clear why this happens. Someone might say that this trend is the result of political decisions in the US and in the UK, but it would be more likely to say that this happens contrary to these decisions. Unfortunately, there are no indicators that provide an answer to this question – only time will show it.”