Global economy remains strong, despite headwinds

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  • 03 mins 13 secs
The global economy appears to be shrugging off headwinds to maintain its current strength. Economist Darrell Spence offers his views of the world’s major economies at midyear.

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American Funds
American Funds video transcript: “Global economy remains strong, despite headwinds”

Will McKenna: Darrell, we've had a nice tailwind here for some time, in terms of synchronized global growth. A lot of countries growing together in tandem. But also, a number of headwinds that investors are focused on. As you think about the rest of 2018 into 2019, give us your outlook on the global economy.

Darrell Spence: Yeah. I think, as we look out across the world, things still look fairly synchronized, but perhaps just slightly less synchronized than when we talked six months or so ago.

In the developed world, the U.S. is still leading the charge. The cycle is very strong. Consumers are benefiting from a very strong labor market, leading to accelerating wages. They're also benefiting from the tax cut that was implemented earlier this year. Exporters are seeing strong demand for exports, partly a function of the weaker dollar that we've seen over the past year or so. And businesses are starting to invest again, partly because of the strong demand but also because they, too, are benefiting from a big cut in the corporate tax rate that occurred earlier this year. However, it's pretty clear that the U.S. is moving into the late cycle, and that does have some implications. But we think for 2018, growth is likely to remain pretty healthy.

Shifting over to Europe, after a very strong second half of 2017, growth in Europe has started to slow — perhaps more than, I think, people expected it to. There's some debate about whether that's a function of the flu epidemic, coupled with some pretty severe winter weather, but I tend to think it's something a little bit more fundamental than that. Part of it is related to the strong euro, which is really hitting European exports. Also, political issues are starting to bubble up again. The most recent example is Italy, where a new coalition government has raised questions about fiscal sustainability and the future of the euro. So, while we still think 2018 will be a positive, albeit moderate, growth period for the euro zone, there is increasing risk that there's some political event that knocks the markets around, or maybe even the economies around.

And then finally, in China, I think things are actually shaping up better than perhaps the consensus thought they would this year. Consumers there are also benefiting from some very strong wage growth. And also, exporters are doing well, because the global economy is still growing. We think growth will slow slightly as we exit 2018 into 2019, because China — somewhat similarly to the U.S. — is much later in the cycle than a lot of other areas. So, the authorities are starting to put in some restrictive measures. They're clamping down a little bit on shadow banking, clamping down a little bit on local government debt issuance to fund infrastructure. All of this causes the economy to slow a bit as we exit this year into next. But this isn't 2015–2016, where there are some serious concerns about China having a hard landing. Rather, it's more just the normal ebb and flow of the Chinese economy.

So, on the surface, it doesn't look a lot different than the last time we chatted. But underneath the surface, there's a little bit of a change in the composition of growth.



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