2018 begins during a synchronized global economic boom
Given the economic data, I am starting 2018 in a surprisingly downbeat mood. Everything I see is pointing to continued expansion in the global economy.
Yet, rather than focus on that bright picture, mentally at least, I start this year more alarmed at the geopolitical backdrop than calmed by the synchronized boom. Maybe this is just a mood since I tend to discount political factors as the driving force for economic factors, at least over the short- or medium-term. Nevertheless, something has me worried and I can’t put my finger on what it is. When I do, I will blog about it.
On the data front though, this year is beginning on a very positive note. Eurozone manufacturing PMIs point to “sizzling” economic growth numbers. Even the UK’s numbers are really good. Plus, Euro area problem child Greece looks to finally be leaving the penalty box this year. As it leaves the troika bailout program, manufacturing is at a near-10-year high. And that’s just Europe.
We already know that Japan has seen its longest growth streak since 1994. Expect that growth to continue in 2018, with the only question whether the economy is showing signs of exiting deflation. I also see the US economy continuing its breakout from the 2%ish growth range into a 3%ish range. With China and emerging markets also doing relatively well, 2018 is beginning on a solid note.
So where is this headed? If heady oil prices and record US production are any indication, we are looking at a demand-driven upsurge that has legs. And right now, there is nothing on the horizon that says a marked slowdown is in the offing.
I will have a bit more to say about my geopolitical concerns later — and also about how my blogging and newsletter format is going to change this year. But on the global economy, I am very positive as this year begins. And I want to end this post with that message.
P.S. – Oil is a big factor for me here because oil sector investment is not just a sign of demand-led growth but also a contributor to US GDP via the investment side. This is a double-edged sword, as we saw when the shale bubble popped a few years ago. But let’s also remember that, even if we do experience a slowdown in growth, it’s not a foregone conclusion that it means the end of the cycle is nigh. We saw this in 2015 after the oil industry cratered on the back of $30 oil. Read my piece from April of that year, “US Economy: Q1 as a mid-cycle pause”. I think it shows the cautiously optimistic economic case in a favourable light since things played out well subsequently. The same could also happen again if the economy slows. And we are nowhere near even a 2015-style mid-cycle pause yet.