The global recovery needs to call its agent.
An economic rebound as brawny as the one projected this year ought to be a cause for celebration. It’s a relief that gross domestic product will enjoy its biggest spurt in years — perhaps even decades — following the biggest drop since the 1930s. Instead, the almost daily upgrades to growth forecasts are met with handwringing about how everyone is too dependent on the US and China — and the prospects for a significant jump in inflation. Naysayers sometimes sound like they’d prefer a subdued expansion.
The revival is likely to be very impressive. On Tuesday, the International Monetary Fund raised its forecast for the world expansion to 6%. That followed a mark-up last month by the Organization for Economic Cooperation and Development. Bloomberg Economics sees a stunning 6.9% advance, the most in 60 years. Many of these bullish scenarios are based on a burst in the US that recalls the halcyon days of the mid-Reagan era and Chinese numbers that resemble the boom in the decade following Beijing’s entry to the World Trade Organization.
Is it a problem that the world’s two major economic powers are hitting it out of the park? You might think so, given some of the focus on the recovery’s imperfections. Yes, ideally you want something more broadly balanced, with more of the developing world and the euro zone sharing the spoils. But a big bounce from 2020’s disastrous contraction isn’t going to happen without the US and China doing very well.
I am struggling to recall a meaningful spurt of global growth that hasn’t been lopsided, to at least some degree. In the years immediately after the global financial crisis and, before that, the tech bust of the early 2000s, it was China getting the accolades. Double-digit growth there was the norm. Going back to the Reagan superlatives, the US was the key driver of the recovery from the early 1980s global downturn. Big parts of the world didn't even participate in capitalism at that time. The Cold War with the Soviet bloc was grinding on, and Deng Xiaoping had just started to open China up.
The other main complaint is that the US is exporting reflation. Bond yields around the world have climbed the past few months on expectations that prices will pick up. Of course, they will. A boom of the magnitude projected is, by its nature, reflationary. Many of the pessimists also tend to forget that, before the pandemic, one of the biggest gripes was that inflation was too low.
What’s probably happening now is that, rather than an inflation problem, we are seeing some of the deflationary forces dissipating. In South Korea, for example, inflation returned to its pre-pandemic level in March as oil prices remained stronger and consumer demand started to recover after a year-long slump. But that pre-Covid-19 level was a meagre 1.5%, compared with a year earlier, well below the Bank of Korea’s target of 2%. In many parts of the world, certainly in Asia, we are quite a ways from the type of ‘bad’ inflation that was the scourge of the world in the 1970s and early 1980s.
An undue focus on the blemishes of this boom might reflect a deeper paradigm shift, one that people are having trouble processing. As my colleague John Authers noted, this is potentially a boom unlike any that investors have seen in their professional lives. I’ll go further and say the geographic nature of this boom — the best American performance since victory in the Cold War — is making life uncomfortable. It’s been almost four decades since the US has driven the global economy like this.
For much of the intervening period, we have been inundated with the message that China’s rise is the biggest thing since sliced cheese. A sibling narrative has been that emerging markets, buoyed by high growth rates, young populations and an ascendant middle class, are the future. The US, however, is looking more vigorous than many emerging markets right now. (And by the way, the demographic dividend isn’t paying out so much in Asia these days, as I wrote here and here.)
This is all a lot to digest for a generation reared on the idea that China had some magic formula and the West — with Washington as its proxy — should be content with just a few percentage of points of growth a year. There has been a drumbeat of prognostications that China will eclipse America as the world’s biggest economy as soon as this decade. Maybe so. But the Fed’s rescue of the global monetary system and now the turbo-charged US expansion this year tell us that Uncle Sam isn’t quite so down and out. I suspect we may end up needing a new framework for looking at the world. For now, let’s just start by enjoying 2021.
Bloomberg
