Global Economy I: Booming? The global economy is showing more signs of booming, as Debbie and I review in the next section. Why might that be happening?
Several explanations come to mind. They are not mutually exclusive.
Consider the following:
(1) Global monetary policy remains ultra-easy. While the Fed has started to unwind its balance sheet in a very gradual fashion, the ECB and BOJ are continuing to load up on securities through their respective QE programs. Over the past 12 months through August, the Fed’s assets were unchanged at $4.4 trillion. The ECB’s assets soared $1.3 trillion to a record-high $5.1 trillion. The BOJ’s assets also hit a record high during August of $4.7 trillion, up $184 billion y/y. Altogether, the balance sheets of the Three Sisters rose $1.5 trillion y/y to a record $14.1 trillion (Fig. 1 and Fig. 2).
(2) Chinese bank lending is at a record high. No piker in this central bank monetary extravaganza is the People’s Bank of China, with assets of $5.2 trillion during August (Fig. 3). That’s actually down slightly by $178 billion y/y. On the other hand, China’s bank loans have increased by a record $2.0 trillion over the past 12 months through August to a record high of $17.5 trillion (Fig. 4).
(3) The 50% cut in oil prices since mid-2014 is a big windfall. We estimate that the drop in oil prices since mid-2014 through mid-2017 has saved $1.8 trillion for global oil consumers (Fig. 5). The initial plunge in oil prices seemed to depress global economic activity as the oil industry retrenched quickly. The rebound in the price of a barrel of Brent from a low of $27.88 on January 20, 2016 to $56.09 currently has revived the oil industry. US oil field production is back at the highs of early 2015 (Fig. 6). However, there remains a substantial windfall for consumers at current prices, which remain much lower than they were during H1-2014.
(4) Mass immigration into Europe is boosting the region’s growth. The number of people with an immigrant background in Germany rose 8.5% to a record 18.6 million in 2016, largely due to an increase in refugees, the Federal Statistics Office said last Tuesday. Germany took in more than a million migrants, many fleeing war and poverty in the Middle East and Africa in 2015 and 2016.
Chancellor Angela Merkel’s decision to open borders initially hit her popularity and boosted the anti-immigrant Alternative for Germany (AfD) party, though she won a fourth term as chancellor in elections last month. In any case, the surge in immigrants might also explain the faster pace of growth in Germany.
(5) The global bull market in stocks is having a very positive wealth effect on growth. The value of all equities traded just in the US alone soared $23.4 trillion since the start of the current bull market from a low of $10.9 trillion during Q1-2009 to a record $34.3 trillion during Q2-2017 (Fig. 7). It’s up 62% since the previous bull market high during Q2-2007!
Global Economy: Booming! A trillion here, a trillion there: It’s all adding up to serious money. Any one of the stimulative developments mentioned above could contribute to better global economic activity. Put them altogether, and the result could be a global boom. Consider the following:
(1) South Korean exports soaring. Our focus on the global economy today was inspired by South Korea’s September exports data released yesterday (Fig. 8). They mostly meandered sideways at record highs from 2011-2014. Then they fell during 2015. They recovered to their record highs by early 2017. During September, they went vertical, jumping by 17% m/m and 38% y/y. It will be interesting to see if September data for any of the other major Asian economies outside of China confirm that something big is up in the global economy (Fig. 9).
(2) Economic Sentiment & M-PMIs very strong in Europe. Another notable sign of a global boom is September’s Economic Sentiment Indicator (ESI) for the Eurozone (Fig. 10). It rose to 113.0, the highest reading since June 2007. It is very highly correlated with the y/y growth in the region’s real GDP. Leading the way is Germany’s industrial component of the ESI (Fig. 11).
Germany’s M-PMI led the pack of rising indexes among the major European countries (Fig. 12). It rose to 60.6 last month, confirming the strength in Germany’s industrial ESI and in the German Ifo business confidence index. Solid M-PMI readings were also registered last month in France (56.1), Italy (56.3), Spain (54.3), and the UK (55.9).
(3) German unemployment at record low. German unemployment slid to a record low in September. The jobless rate dropped to 5.6% in September, down from 5.7%. That’s impressive considering the migration inflow over the past two years.
(4) US M-PMI in the 60s. In the US, the national M-PMI rose to 60.8 during September (Fig. 13). That’s the best reading since May 2004. The composite’s three major components had readings exceeding 60.0: New Orders (64.6), Production (62.2), and Employment (60.3). That trifecta is a very unusual occurrence.
(5) Global M-PMI. The global M-PMI remained relatively high at 53.2 last month, as Debbie discusses below (Fig. 14). While the M-PMI for emerging economies dipped to 51.3, the index for advanced economies rose to 54.6, the highest since February 2014.
(6) Forward revenues and earnings rising rapidly. Over the past year, forward revenues and earnings have been rising to new record highs for the US MSCI stock price index. Since early this year, there has been a significant rebound in the forward earnings of the All Country World ex-US MSCI (Fig. 15 and Fig. 16)
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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