TalkingEconomics: Global markets summary July 2015

Five years on from the world economy's initial rebound in 2010, it is clear that the growth environment is best described by a square-root sign. 

16 July 2015

Keith Wade

Keith Wade

Chief Economist & Strategist

Flatlining global growth

The initial U-shaped upswing has given way to a world of flat 2.5% growth, well below the performance prior to the financial crisis.

The comparison with the pre-crisis world highlights the absence of a global locomotive and means that we are unlikely to break with the square-root recovery.

The recovery in growth from the Global Financial Crisis can best be described by a square-root sign.

Following the initial collapse and rebound, global growth has flat-lined at a steady, but sub-par, rate of 2.5%, which is half the rate achieved prior to the financial crisis.

This slowdown is largely accounted for by the emerging markets, where growth has slowed as a result of weaker demand from the West for emerging market exports.

However, we expect a continued recovery in Europe and Japan, as well as steady growth in the US, to push global growth up to 2.9% in 2016. This in turn should feed through into better exports for the emerging markets.

Looking for a global locomotive

In general though, we are doubtful that global growth will return to its pre-crisis pace, largely because the US is no longer the global locomotive that it once was.

With subdued credit growth, an ageing workforce, increasing inflationary pressure and looming interest rate rises, the economy is not in a position to reprise its role as the driver of global growth.

It is difficult to see who might take on this responsibility:

  • The eurozone is only just escaping deflation and, like Japan, is relying on currency depreciation to reflate activity.
  • China is in fact too small – we estimate that China represents less than 10% of global consumption compared to the US’s 25%.
  • Hopes that India may become the new driver of global demand look a tad optimistic as domestic consumption is little more than 2.5% of the global total.

The comparison with the pre-crisis world highlights the absence of a global locomotive and means that we are unlikely to break with the square-root recovery.

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