Synchronized Global Expansion

Almost all regions of the world are now growing. Global economic growth will be about 3.7 percent in 2018, and Goldman Sachs projects it will accelerate to 4 percent in 2019. Global economic conditions are important for Montana manufacturers because several prominent firms operate in the world market, and their exports depend on economic conditions worldwide.

Europe and the Eurozone – Hitting on All Cylinders
With the double-dip recession and debt crisis in the rearview mirror, the EU is projected to post consistent 2 percent real growth over the next few years. Almost all areas are experiencing positive growth, even countries such a Greece and Spain will grow at or above the EU average. The contribution of EU imports to global trade equaled that of the U.S. and China.

Germany remains the growth leader, with France lagging just a bit behind. Conversely, Italy is still saddled with political instability and a debt crisis. Unemployment remains high in certain countries, but it has begun to decline. Rates are still in the 15 to 20 percent range in places such as Greece and Spain but are down from the 25 to 28 percent reported four or five years ago.


 

The U.K. economy is decelerating, but the collapse predicted by some Brexit skeptics has not occurred. Real GDP growth is down from the 2.3 percent in 2015, but the drop was only to 1.5 percent in 2017. The forecasts for 2018 and 2019 are in the 1.4 to 1.6 percent range. Future Brexit and other trade negotiations are still uncertain and could become rancorous.

Hanging over the entire region is the potential for an energy crises. The unresolved situation between Russia and Ukraine could result in a sharp drop in energy supplies to Europe and a corresponding rise in prices.

South America – Finally Growth is Projected
The South American economy should continue to show modest growth. The Brazilian economy is now growing after several years of decline, while Venezuela’s economy remains a basket case.

Brazil, the largest economy in South America, began to grow in early 2017 after eight consecutive quarters of decline. Brazil’s inflation rate has moderated, but price stability remains a problem in other countries. For example, Argentina is projected to have an annual inflation of 13 percent per year for the next decade. Venezuela continues to be plagued by low oil prices, rampant inflation and political instability. The unrest there is spilling across the borders and impacting nearby countries.

Mexico – Moderate Growth Continues
The past 15 years have witnessed a period of economic stability previously unseen in Mexico. The Mexican economy is holding at about 2 percent growth and fiscal policy remains moderate, but a recent hike in inflation to 6.6 percent may be troublesome. The poverty rate remains high and has not budged, and large income inequities persist. By far the biggest future uncertainty is the renegotiation of the NAFTA treaty.

India – Temporary Slowdown Over
Economic growth in India is projected to strengthen to more than 7 percent, surpassing China in 2018 and 2019. The economy was temporarily slowed by the imposition of the Goods and Services Tax (GST) and monetary restructuring designed to choke off the black market economy. In the long-run, the GST will simplify the tax system and promote growth.

China – Data Uncertainties
Reliable economic data for the Chinese economy remains problematic. Data and analyses from a number of sources place real GDP growth at slightly above 6 percent per year. The red hot housing market has cooled somewhat and bank lending has continued to grow unabated due to lax regulatory controls. But the resulting bad loans could trigger a credit crisis or even worse, a recession.

Japan – Steady as She Goes
Growth picked up to 1.5 percent in 2017, but is projected to remain close to 1 percent in 2018 and 2019 as export growth remains robust. Government debt poses a serious risk. It stood at 220 percent of GDP, the highest ever recorded in an OECD country.

Canada – O Canada!
Canada had above potential growth of about 3.1 percent in 2017, having weathered the oil price shocks and mild currency strengthening. The projections are for about 2 percent growth in 2018 and 2019, less than the 2017 figure but more in line with the long-run potential growth. Canada, like the U.S., is close to full employment and wages are accelerating. The housing market may soften a bit as interest rates move higher.

United States – Slow Growth Continues
The good news is the U.S. economy continues to strengthen. The bad news is that it is not strengthening very much. Real GDP grew 2.3 percent in 2017 and projections for growth in 2018 and 2019 are just 2.6 percent and 2.8 percent, respectively.

Additionally, the length of the current economic recovery is a worry. The cyclic trough from the Great Recession was in 2009 and the economic upturn is now the second longest since World War II. Recessions continue to be surprise events because all attempts to predict them have reliably failed. There will be another recession, we just do not know when.

Even though the recovery has been slow and halting at times, the U.S. economy has returned to full employment. This suggests that renewed inflation is becoming more of a concern for economic policymakers and the U.S. Federal Reserve will probably continue raising interest rates in response.

U.S. manufacturing has been a bright spot during this recovery. Lower oil prices and an abundance of cheap natural gas have kept costs low and provided opportunities for new products and production facilities. Renewed worldwide growth could provide more robust markets for manufacturing exports, but the current threats of tariffs and likelihood of trade wars cloud the outlook for manufacturing exports.

Montana – Riding the Wave
In Montana, agricultural producers have been battered by low prices and drought. An uptick in oil prices during mid-2017 could hold some promise. Extraction costs in the Bakken oilfields are relatively low compared to elsewhere in the world and only a modest but sustained increase in oil prices could stimulate activity in eastern Montana and western North Dakota. Montana’s wood products industry is no longer hemorrhaging. Overall, Montana is projected to grow 2.4 to 2.6 percent in 2018 and 2019, roughly equal to the figures for 2016 and 2017.

Gallatin County stands out as the fastest growing community in the state, with Flathead County a bit behind. Lewis and Clark and Cascade counties have posted modest growth. While Missoula and Ravalli counties have been slow to recover, both are now growing. New and expanded manufacturing establishments are a major factor impacting recent trends in Cascade and Missoula counties.

Montana’s manufacturing employment has grown much faster than the nation since the Great Recession. U.S. manufacturing wage and salary employment rose from 11.5 million workers in 2010 to 12.4 million in 2017, an increase of 8 percent. Montana manufacturing employment increased from 16,400 in 2010 to 19,900 in 2017, an increase of 21.3 percent. This strong performance was in spite of permanent closures in the wood and paper products industries.

Summary – Strong Economy but Considerable Geopolitical Risks
Synchronized worldwide growth indicates the rosiest economic outlook in years. But the world is still uncertain and almost all of the risks arise from social or political origins.

We can expect the election of more nationalistic and euroskeptic leaders in the EU, which could derail the European engine of growth and the impacts of Brexit are still unknown. The refugee crisis in Europe is far from over and the perennial instability in the Middle East continues to be just short of explosive. Finally, the tariff war started by President Trump could derail growth around the world.