Current pessimism about the world economy is overdone. The world’s three biggest economies -- the U.S., China and Japan -- are all in decent shape. Barring a major new deterioration in Europe and unforeseen calamities in the rest of the developing world, a moderate acceleration of global growth looks likely.
How much of an acceleration and how long it might last depend partly on something we can’t really know: the world’s long-term trend rate of growth. This would be a good number to know. It would make it easier to predict stress on scarce resources, for instance, or to decide whether inflation or deflation is in the outlook. Knowing whether growth is above or below trend would make it easier to judge whether the global stance of macroeconomic policy is too expansionary or too contractionary. Trend growth drives long-term welfare: Knowing how quickly living standards will advance would be useful in countless ways.
Unfortunately, the underlying trend is hidden under layers of uncertainty, especially in countries going through rapid change. There’s an adding-up problem, too: Hypothetically, could all countries grow at their long-term potential at the same time? For example, when commodity prices are rising sharply, commodity-exporting countries will grow at a healthy clip, but commodity-importing countries will be held back. Or consider the reverse. In 2013, weak commodity prices hurt Brazil and Russia, for example, but helped the U.K.
Looking ahead, much depends on China. By the end of 2013, the Chinese economy will have increased its output by an additional trillion dollars, to more than $9 trillion. This will make it more than half the size of the U.S. Continued rapid growth in so big an economy will drive the global trend.
Based on the new policy framework outlined by the Chinese government last month and on the more optimistic tone of China-related financial markets, I continue to expect rapid expansion. If that turns out to be correct, something pretty bad would have to happen elsewhere for global growth to fall back to the rates of the 1980s and 1990s.
This is a sensible column, although I would not describe GDP growth as accelerating. Instead, it is slowly recovering in typical fashion from a difficult credit crisis recession. There is no accelerating growth when businesses and particularly consumers are deleveraging over a period of five to seven years, and occasionally longer.
The world’s four largest economies are all recovering. The USA is benefiting from its energy cost advantage and increasing technological lead. China’s economy now shows signs of picking up once again, following a partial shift in emphasis from exports to consumer goods and services. Japan’s stimulus is working, despite high energy costs, and corporate profits are increasing. Germany’s export-led recovery is expanding.