Whither global growth

Written by Stephen Poloz

The global economy keeps chugging along, spewing out great-looking statistics. The question is, where is that global slowdown we have been expecting?

First the broad picture. The world economy grew by 5.1% in 2004, an unsustainably rapid pace. Some moderation in growth in 2005 was both inevitable and desirable. And, although not all countries have published their numbers yet, a moderation clearly did occur in 2005: we estimate that world economic growth was 4.4% last year, a clear moderation from 2004.

But the dynamics of that moderation have been unusual, to say the least. Tracking global economic growth quarter by quarter reveals that the world economy decelerated in late 2004 and then stopped slowing in early 2005. In the first quarter of last year, year-over-year global growth was 4.2%, then 4.5%, and then 4.4% in the third quarter. For the fourth quarter of the year, for which the data are still only partial, we estimate global growth again at 4.5%. In short, the desired moderation occurred quite suddenly in late 2004, after which a four-quarter plateau emerged.

One place where there has been a slowdown is the U.S., where growth fell to 3.1% in the fourth quarter, after cruising at 3.6% for the first three quarters of 2005. But expectations are that the U.S. economy will pick up speed again in early 2006. At the same time, economic growth has clearly increased in Japan and Europe. Although Japan’s renaissance has been evident for some time now, its acceleration from about 1% growth at the start of 2005 to 4.5% by year-end has been astonishing. Eurozone growth has accelerated from about 1% growth to 1.7%, largely because of a stronger German economy. Since the Eurozone is about the same size as the U.S. this is enough to compensate for the U.S. moderation at the global level.

What’s more, the OECD leading economic indicator has been edging higher in recent months, after its big decline in 2004. Meanwhile, there is not much slowing going on in the developing world, either. China’s growth has remained steady at just below 10%, and growth has picked up in India, Russia and Mexico. Brazil has slowed, but even that looks like it could prove temporary.

It is any wonder, then, that many industrial commodity markets remain tight? Although oil prices have eased in recent weeks, and natural gas prices have plunged, many metals prices remain in the stratosphere. Part of this upward pressure appears to be speculative in nature, but the fact remains that physical supplies of copper and zinc, in particular, are very tight. During the coming months there should be a more evident increase in global production of these metals in response, especially for copper. In the meantime, this commodity combination is keeping the Canadian dollar at lofty levels, a situation that will continue until the global economy moderates further and takes oil prices, metals prices and interest rate expectations lower.

The bottom line? The world economy still seems more likely to slow than to speed up. But with global production firing on all cylinders the world’s central banks are on high alert, and are more likely than not to take out some additional anti-inflation insurance by nudging interest rates higher.

February 23, 2006

The views expressed here are those of the author, and not necessarily of Export Development Canada.

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