The global growth collapse that never was but may still be

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Global GDP growth slowed only very marginally in Q3, to about 3.0% year-in-year, in line with my October forecasts. Perhaps even more surprising is World Bank data pointing to quarterly growth having flat-lined at 2.5% yoy between Q2 2014 and Q3 2015.

Year-to-date growth and the up-tick in global PMIs in October-November support the IMF’s prediction of 3.1% GDP growth in 2015, down only marginally from 3.4% in 2012-2014.

So while global trade, inflation and commodity prices have fallen sharply this year, global growth has not thanks in part to resilient consumer demand. This may, at the margin, have given the US Federal Reserve the confidence to hike its policy rate.

But the slowdown in global growth in 2015, despite still record low global policy rates and eurozone quantitative easing, does not provide much cheer for next year.

Q3 GDP data are out…and it’s not that bad

Global real GDP growth in Q3 slowed only marginally to 3.0% year-on-year (yoy) from 3.1% yoy in Q2, according to my estimates using IMF purchasing power parity (PPP) weights (see Figure 1)[1]. Countries which have so far released Q3 GDP data account for about 95% of world GDP.

This marginal slowdown is line with my October forecast (see Global growth down but not out) and broadly in line with World Bank data pointing to stable GDP growth in Q3 of 2.5% yoy (see Figure 1)[2].

Olivier Desbarres fig1 global growth

Global GDP growth in the first three quarters of 2015 was about 3.1% yoy, suggesting that the IMF’s growth forecast of 3.1% for the full-year is still attainable (see October World Economic Outlook). Indeed, global manufacturing PMI data, which have historically correlated reasonably well with global growth, suggest that growth was stable or slightly stronger in Q4 (see Figure 2). The average PMI in October-November ticked up to 51.25 from 50.8 in Q3.

OD Global Growth fig2

No clear unifying theme emerges when we turn to individual countries, with emerging economies at both extremes of the growth spectrum and developed economies dotted across. India and China still lead the growth race, if their official numbers are reliable, while growth in Brazil and Russia has slumped in tandem with collapsing commodity prices. Spanish GDP growth rose to 3.4% yoy in Q3, GDP in the US and UK is growing at a commendable 2.5%, while France, Italy and Japan still lag on sub-1% growth (see Figure 3).

OD Global Growth fig3

So while global trade, inflation, and commodity prices have fallen sharply this year, global growth has not. One reason is that consumer demand for goods and services has been reasonably resilient, shored up by rising employment and wage growth in the US, UK and lesser extent eurozone. In China, the manufacturing sector is losing ground but the service sector is enjoying decent growth. This may, at the margin, have given the US Federal Reserve the confidence to finally hike its policy rate this week.

But the slowdown in global growth in 2015 to multi-years lows is still somewhat concerning given how loose interest rate policy has remained and the limited scope for further significant, effective, monetary policy stimulus. The ECB quantitative easing program is now one year old, policy rates in the US, UK, Japan and eurozone are near zero, policy rates in three European countries are negative and most major central banks have cut rates (including Australia, Canada, China, India, Indonesia, Korea, New Zealand, and Turkey). The IMF, OECD and World Bank may arguably have to again revise down their 2016 growth forecasts, which currently stand at 3.6%, 3.3% and 3.3% respectively.

Olivier Desbarres

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

 


 

[1] These are estimates as the IMF does not release quarterly GDP data.

[2] The World Bank and IMF use different country weights, which explains the difference in their estimates of global growth. The IMF uses purchasing power parity weights, the World Bank market weights. The IMF attributes a greater country weight to China’s GDP growth rate, which has slowed sharply and thus weighed more greatly on the IMF’s measure of global growth.

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