Thoughts on the global economy - The Monday Briefing

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Last month Deloitte’s economists from across the world met in London to assess the outlook for the global economy. It was a fascinating and wide-ranging discussion. Rather than trying to summarise individual views, here are some of the areas where the discussions affected my own thinking.

First, the US growth outlook for this year is bright, thanks in part to the boost from tax cuts. However, I came away from our meeting thinking that the US is quite likely to hit a recession in or before 2020, as the effect of higher interest rates kick in and the impact of tax cuts lapse. Fortunately the risks of recession in the rest of the world currently seem lower than in the US.    

Second, interest rates will provide valuable signals about the risk of a US recession. The yield curve, the gap between short-term and long-term interest rates, gauges the tightness of monetary policy. As central banks raise interest rates, the gap narrows and, in the jargon, the curve flattens. The US yield curve has flattened significantly, with the gap between short and long term rates falling to just 70 basis points (bps) last week, pointing to tighter monetary policy. We’ll be watching that gap; every post-war US recession has been preceded by short-term rates moving above long-term rates, a so-called inverted yield curve.

Third, China is moving to a new, slower growth path. In the 34 years up to 2016 Chinese growth averaged a staggering 10% a year and never dropped below around 4% (in a good year the US might post growth of 3.0%). The phenomenon of a vast, populous country growing for over three decades at such a rapid rate is without parallel in history. But a maturing economy and a shrinking workforce is slowing Chinese growth. In the long term, growth of 3-4% may well become the norm. The global economy will have to get used to slower Chinese growth.

Fourth, the German economy is, in the words of my colleague Alexander Borsch, “having the time of its life”. German growth this year, around the 2.5% mark, will be twice its trend or sustainable rate. The German economy is certainly running ‘hot’. Alex told us that house prices have become a staple of dinner party conversations in Germany in much the way they are in the UK and the rest of the Anglophone world. Since 2008 German house prices have risen 50%. Over the same period, which included big falls, UK house prices have risen by 16%, US prices by 15%. Rising house prices and the appreciation of the euro against sterling means that a UK investor who bought German property ten years ago would have seen a 79% gain.

Despite discussion of recession risks I was struck by a cautious optimism about the long-term outlook. There was a general view that the slowdown in productivity growth in the West has been overstated, partly because of problems in capturing gains from technological change and quality improvements. As a result most of us felt that Western economies should be able to improve upon the lacklustre growth rates seen in the last ten years.

We agreed too that apocalyptic media stories about new technologies destroying work were overcooked; technology would continue to create more jobs than it destroys. The challenge would be to provide people with the right skills to prosper. The question was, what skills? We had a show of hands on what we would recommend as the ideal degree subjects for an 18-year-old planning for a 40-year career. Two-thirds advocated STEM subjects, so science, technology, engineering and maths. A third, myself included, opted for humanities/liberal arts as a way of honing skills of expression, creativity and thinking.

Happily we concluded with a consensus and perhaps a case of “have the cake and eat it too“ thinking. We agreed that the ideal degree would combine STEM and humanities.

PS: Over the last week we’ve seen more evidences of a softening in global growth in the first quarter. US growth moderated slightly and the UK grew by just 0.1% in Q1, the weakest reading in six years. The German Ifo survey of business sentiment, one of Europe’s most important indicators, fell for a third consecutive month. The European Central Bank left monetary policy unchanged and its president, Mario Draghi, said the region’s recovery had lost momentum. The euro fell to a three-month low against the dollar on the news.

PPS: The Financial Times featured a letter from Dr Lawrence Haar, Associate Professor at the University of Lincoln, arguing that poor UK productivity growth reflected the UK’s low unemployment rate. Dr Haar wrote that low unemployment means almost everyone, including less productive workers, find jobs whereas high unemployment means that only the most productive find work. This may partly explain the UK’s poor productivity record. However, it does not have to be this way. Some economies, including Singapore, Switzerland and Germany, combine low unemployment and decent productivity growth. The right training and education can raise productivity rates for lower skilled workers.