Uncertainty in Italy is just the latest indication that hopes for 2018 were overblownby George Magnus / May 29, 2018 / Leave a comment
At the beginning of 2018, there was a distinct and welcome mood of optimism about the prospects for the global economy. IMF Chief Economist Maurice Obstfeld noted positive surprises in China and in advanced economies, including in Europe. He was by no means alone in framing a consensus articulated also by banks, global consulting firms and governments. Your scribe wasn’t so sure as you can see here, here, and here. As we approach the half-way stage of the year, the consensus has become rather more sober. Has a synchronised global recovery become a desynchronised and faltering expansion?
Some indicators of the health of the world economy have definitely raised a few eyebrows. The Baltic Dry Index, which reflects shipping activity, has fallen sharply this year following an erratic surge in 2016-2017. The International Air Traffic Association’s index of freight tonne kilometres, which reflects cargo volumes by weight and distance, was at its lowest level for two years in March.
Crude oil prices have been on a bit of a tear, with Brent crude, for example, rising from just over $60 a barrel at the start of the year to just under $80 a barrel. This probably reflects supply restrictions by Opec countries and Russia, and shortfalls in Venezuelan output, more than surging demand. Yet higher prices may dampen global demand, unless Opec agrees to tap (limited) unused capacity at its June meeting in Vienna.
Other barometers of the state of the global economy have also turned. Exports from South Korea—often a useful trade guide since the country is key in China’s and global supply chains—fell in April for the first time since late 2016. Chinese economic activity data has softened too, as I noted last week. The chillier relationship with the United States over trade, technology and investment also hangs as a dark cloud over Chinese and global growth prospects. Japanese GDP dropped by 0.6 per cent in the first quarter of the year, offsetting an equivalent rise in the previous quarter.
The major concern, though, has been Europe, about which there were high expectations after a solid performance in 2017. As we know, the UK has been the weakest economy, with growth sliding to just 1.2 per cent in the year to the first quarter, but the Euro Area has been softening too. Overall, growth was just 0.4 per cent early this year, just over half the rate…