The world economy is on a weak growth trajectory. Expectations are always too positive and the recurrent downward revisions of its global forecasts by the IMF are problematic.
Fives charts can help us to understand what going on at the global level.
The global economic situation can be characterized by two elements: production and trade.
The chart below shows the world industrial production index. This index is computed by the CPB a Dutch institute from national sources
There are three distinct periods. For each of them I’ve computed a simple exponential trend.
Before the crisis the index was up by 4.4% at annual rate. It’s the red line
- During the recovery period its growth rate was 8.7%. It’s the blue line
- From the beginning of 2011 to now the pace is slower at +2.4%. It’s the yellow line
These 3 periods reflect the ways the economic situation has changed. What is important is what has been seen after the 2008 break. In 2009 and 2010 the recovery came from strong plans that were put in place in a lot of countries from the USA to China and Europe. The exhaustion of these different plans implied a reduced dynamic for the world economy. This period has shown that industrialized countries were not able to take the lead from emerging countries, specifically Asia and mainly China in this region. (At this moment in the USA was deeply discussed the size of the plan. Some considered that it was too small as the US economy was not able to converge to its full employment trajectory).
We can see the change after 2011
(Emerging countries profile is on a steeper profile than industrialized countries. This reflects a catch up process)
The recovery can clearly be seen on the chart in the two regions. It is stronger in emerging countries with China as leader. But from 2011 we see clearly the dynamic exhaustion coming from the end of the different plans and the absence of relay from developed countries. These latter are not able to find an endogenous dynamic that could continue the recovery trend. From the beginning of 2011 the developed countries index is flat. That’s the weirdest situation and the contrast is important with previous periods. In the past after a recession, a country was able to play the role of leader, the one which was able to jump on a higher trajectory and bring with it the global economy. Very often in the past, the United-States have done such a jump. Currently they were not able to do it. No country is able to have this lead.
In the short run it can be interesting to measure contribution of each country or region to production growth. That’s what is done in the following chart. Each region is characterized by its contribution to world production annual growth.
Looking at the whole chart we see that the last figures are small compared to what was seen in the past. No region has a contribution that is higher than its historical average (in the legend the first number is the contribution average on the period 1992-2007 and the second is the last available (February 2013)).
No region can move above its historical average, none has the resources to do that.
In other words this shows that none of these countries or region has the leadership and the possibility to be on a full employment trajectory and pull the world economy with it.
If the USA and Asia ex Japan are not able to make an upside break we see that Japan and the Euro Area are a drag to world economic growth. This chart shows in a very simply way the impact of the Euro crisis on the world economy and on global growth.
World trade dynamic can be read from the chart below. The purple line is the world trade yearly change. At the end of February 2013 it was up by 1.7% from February 2012. This is well below the blue band. This latter represents the growth rate average from 1992 to 2007 +/- a standard error.
We also notice that since fall 2011 the line is below the blue band indicating that the world trade momentum has been low for a very long period of time.
On the chart contributions to yearly change are again below their historical average. None of this country or region is able to create a positive impulse that will be a positive shock for the others and change the world trajectory. Usually for a country external trade growth is a catalyst for economic growth and jobs. This cannot be seen in the current episode of the world economy.
Asia ex Japan and the United-States again have positive contributions to world trade growth. But they are still below their historical average and none of them is able to create a positive shock.
Japan and the Euro Area are still a drag to world trade growth and we see the large and long lasting of the Euro crisis on trade.
World industrial production and world trade are still on a mild trend. This reflects the large uncertainty seen on the world trajectory.
As no leader can make a shift, a positive break that could bring the world economy on a higher trajectory, no region has its own activity mainly driven by external trade. So each country or region has to solve its own internal constraints to be able at the end to converge to a full employment trajectory. These constraints are: deleveraging in the USA, the growth rebalancing process in China, and new institutions and a new growth model in the Euro Area.
As every region is constrained we cannot expect a strong growth rebound as long as these constraints are binding.
Looking specifically at the Euro Area situation we see its negative role on global growth and the importance of austerity policies. These latter have had a negative impact on Euro area growth. Current discussions at the European Commission are on the speed of rebalancing public finances. If the rebalancing is not too rapid, then austerity policies will be relaxed and it would be good news for the world economy.
Due to the global weak growth pattern, there is a lack of investment opportunities. So it is not surprising that interest rates remain low. By arbitrage, if real returns on investment are low as there is no opportunity, there is no reason to have high interest rates. Both returns on real and financial assets will remain low as far as economic prospect remains poor. Very accommodative monetary policies from central banks are just a way to show this lack of opportunities.
It means that expecting higher interest rates with such a weak economic prospects is an illusion. Interest rates will remain low for a very long period of time.