Less than a month ago in the imposing setting of the IMF’s HQ2 building in Washington DC, Gita Gopinath, its new chief economist, had a bleak message for the world. Disappointing data had led the fund to cut its forecasts for global growth yet again, any recovery pencilled in for the second half of this year was “precarious” and this toxic combination meant that spring 2019 was a “delicate moment” for the global economy. Less than a month later the IMF’s message appears to have been far too gloomy. Over the past few days the three largest economic blocs in the world — the EU, China and the US, comprising almost half of global output — have published their first quarter estimates and all three have been stronger than expected. On the latest data, at least, the slowdown of late 2018 has already ended. In Europe the single currency area grew 0.4 per cent in the first quarter, according to preliminary estimates, significantly higher than expected. Italy has emerged from recession and Germany, which has not published its figures yet, is also likely to show improved performance. Outside the eurozone growth has been stronger still, with the EU economy as a whole growing at an above-average rate of 0.5 per cent. The Bank of England last week upgraded its forecast for the UK’s performance this year from 1.2 per cent growth to 1.5 per cent, with governor Mark Carney saying the global outlook had become “more benign”.
Europe’s above-trend performance has been eclipsed by even stronger data coming from the US economy. First-quarter growth of 0.8 per cent, the US reports this as 3.2 per cent on an annualised basis, was far higher than expected for a quarter that started with a prolonged government shutdown. Although the details suggested that strength might be partly temporary, the figures still indicated considerable momentum. In China growth stabilised at an annual rate of 6.4 per cent and more up-to-date figures from industry suggested that the government’s infrastructure stimulus was having its desired effect, with industrial production rising at an annual rate of 8.5 per cent in March — much stronger than analysts had expected. Catherine Mann, chief economist of Citi, said the outlook is still fragile but “growth has stabilised”, adding that “prospects [have] changed from the IMF’s ‘glass half empty’ to ‘glass half full’”. In London, the National Institute of Economic and Social Research’s economic model suggests 3.4 per cent global growth this year, compared with the IMF’s 3.3 per cent forecast. Jagjit Chadha, its director, criticised the fund’s “caustic” message. “This decade will probably be seen as one of remarkably sustained economic growth,” Prof Chadha said. “Whilst there are clear risks from the build-up of public and private debt, the data has not and does not yet support the IMF’s view of highly precarious world growth.”
There are some dark spots in the global outlook and economies that were weak in the first quarter, but these are the exception rather than the rule. Iran, for example, is suffering from economic sanctions, the South Korean economy contracted in the first quarter on the back of a drop in exports to China and Turkey’s economy appears to be increasingly vulnerable to further capital flight as it struggles to deal with a recession. Equity markets sensed the change in mood long before economists, the MSCI World equity index has risen 21 per cent since it troughed on Christmas Day, and the question now occupying analysts is why the global economy has turned the corner so much earlier than expected. Kevin Daly, senior economist at Goldman Sachs, said the slowdown was largely caused by rising US interest rates which tightened global financial conditions, combined with concerns over a trade war and rising oil prices. “The improvement this year is due to the partial reversal of those factors,” he said. Ms Mann added that the continued resilience of the service sector and strong labour markets had boosted incomes and there had been a helping hand from the Chinese fiscal stimulus.
The gloomy forecasts were largely driven by trade and manufacturing woes and arguably paid insufficient attention to household income growth, low unemployment and strength in services. As a result some forecasters have begun to edge their economic forecasts higher; Citi has just raised its global economic growth estimates for the first time since February 2018. However concerns remain that the rebound will peter out, particularly as global goods trade volumes over the past three months fell year on year, for the first time since the financial crisis a decade ago. “Growth has stabilised but the slide in imports has not,” warned Janet Henry, chief economist of HSBC.
Leading economic indicators, such as those produced by the OECD, are still flashing warning signs. And there are concerns about the nature of growth, with consumption doing most of the heavy lifting and business investment in the doldrums almost everywhere. This points to “stabilisation rather than a rapid revival”, said Ms Henry. And there are big risks on the horizon. Few expect Donald Trump’s rapprochement with China to end the talk of trade wars and many fear an escalation with the EU once an agreement has been forged with Beijing. Momentum in the US economy is also potentially dependent on further fiscal stimulus, which is far from guaranteed. So the bright spring of 2019 is not guaranteed to turn into a hot summer. But economists and financial markets increasingly agree there is no longer any need to talk about a global economy on the slide.