Economics

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. 

16/07/2015

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.

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.