9 November 2017

A Good Time for Developed Economies

The past decade has proven to be a very trying time for most of the world’s developed economies.  Almost ten years ago, the first developments in what would morph into the global financial crisis were appearing, a traumatic event that would push nearly all of the world’s developed economies into deep recessions.  Since the recessions of 2008-2009 ended, most developed economies have experienced what can only be described as tepid recoveries.  In the United States, consistent growth did manage to return in the years after the crisis, but the growth rates that it was able to achieve were well below those of the years before 2008.  In Europe, growth struggled to take hold as that region was buffeted by a series of crises that resulted in multiple recessions in the years following the financial crisis.  Meanwhile, Japan’s long-term stagnation continued, a period of sluggish growth that started 25 years ago.  In fact, nearly all of the world’s developed economies have lived through a period of disappointing growth and rising economic risk levels during this difficult decade.  As a result, many developed economies were fearful that they had entered a period of long-term stagnation, and even decline, one in which they would not be able to extract themselves from.

Fortunately, 2017 has brought a renewed sense of confidence to nearly all of the world’s developed economies.  Of course, the year started with a great deal of uncertainty, as the threats of political turmoil, protectionism and isolationism raised fears of a new economic downturn.  However, after a nervous start, growth rates have risen in nearly all of the world’s largest developed economies in recent months, and 2017 appears likely to be the best year for economic growth in these countries in recent years.  In the United States, a poor economic result in the first quarter has been followed by two consecutive strong quarters in which the US economy has achieved solid rates of growth.  In Europe, economic growth has risen slightly this year, beating expectations and reaching a level last seen in 2011.  Even struggling Japan has managed to record higher rates of growth in 2017, temporarily easing fears of a long-term decline.  Meanwhile, countries such as Canada and South Korea have beaten expectations in 2017, and are continuing to exceed growth rates in most other developed economies.

A number of factors have contributed to these higher rates of economic growth in developed economies this year.  First and foremost, consumer spending levels in nearly all of the world’s leading wealthy countries have risen at a stronger-than-expected pace this year, reflecting rising levels of consumer confidence in these countries.  Meanwhile, export demand has also risen around the world, including in emerging markets such as China, which are increasingly important drivers of growth for many developed economies.  Furthermore, many of those developed economies that are dependent upon exports for much of their growth have benefitted from currency fluctuations in recent years that have improved their export competitiveness.  Finally, the turmoil of the past decade convinced many of the world’s developed economies to enact major reforms that have improved their economic competitiveness and facilitated the higher rates of economic growth that have been achieved this year.

Despite the fact that economic growth has strengthened in most developed economies in 2017, the struggles of the past decade have tempered these countries’ optimism and ensured that over-confidence does not take hold.  Furthermore, while growth has returned to the developed world, the rate at which most of these economies are growing remains significantly below the levels that they were able to achieve in the years prior to the global financial crisis.  Likewise, this growth has been achieved during what can be described as a “perfect storm” of circumstances that include aggressive monetary policies by many key central banks, low commodity prices and favorable exchange rates.  At the same time, the levels of risk faced by most developed economies remain dangerously high, particularly with regards to issues such as the threat of protectionism and continuous high levels of debt in many of these countries.  Add to this mix the unfavorable demographic situation that most developed economies are facing and it is clear that, despite the recent run of solid growth, these countries still face a number of major economic challenges.  As such, 2017 may prove to be the high-water mark for many developed economies who could face more challenges in generating economic growth in the years ahead.