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In the Nation's Interest

The Global Economy: A Glass Half Full or Half Empty?

As 2017 comes to a close, the global economy appears to be wrapping up nicely. Growth performance for this year came in better than anticipated. And looking out to 2018, growth seems to be holding up, at least for now. As shown by The Conference Board Global Economic Outlook 2018, 3% global growth (an average of 1.8% for mature economies and almost 4% on average for emerging markets) in both 2017 and 2018 is nothing to sneeze at.

Still, with the economy making progress but not yet firing on all cylinders, it seems opportune to ask the question: Is the glass of the global economy closer to half full or half empty?

For the pessimists, the half-empty story goes more like this:

Despite the recent recovery, we are not back to the pre-2008 decades, when the global economy enjoyed growth rates of 4-5%. In mature economies, consumption growth is at best modest. The improvement in investment is barely visible and it’s way too early to state a productivity revival. While jobs are growing, wages are still increasing very slowly, and the distribution of income from labor and capital has become very unequal, making a broad-based recovery unlikely.

Potential growth seems to have weakened, and emerging markets in particular are not seeing growth return to what it was in previous decades. As these economies are getting richer, they are becoming more like the mature ones: being less dependent on investment and exports, it’s just harder to grow through more consumption, services, and social welfare.

Emerging markets’ greater reliance on the domestic economy also creates challenges to keep wage growth in check and control inflation. Emerging markets need a continuous stream of reforms that strengthen the economy but don’t generate immediate growth. Reform fatigue has become visible in several countries, including Mexico.

Looking at the medium-term, another factor makes it more difficult to further fill the glass of global growth: the aging of our populations – first, in mature economies, but also increasingly in emerging economies. This will pose a significant challenge to growing the labor force.

Indeed, overall over the next 10 years, accelerating growth beyond today’s level will be extremely difficult. It may turn out that the cyclical tailwinds we are enjoying today will be dwarfed by the structural headwinds of tomorrow.

These structural headwinds include: the challenges around creating the workforce skills of the future; dealing with the impact of technological disruptions; rising inequality and public dissatisfaction, and the impact this may have on globalization and the way our populations are responding to the challenges.

While we need to do a lot of hard work to avoid growth not slipping further below, optimists will take pleasure in the half-full story, which goes something like this:

First of all, given what the global economy had to endure over the past decade, we should feel good about having avoided a global depression that could have been of the proportion of what we saw in the 1930s.

In addition to consumption, which has kept growing at a modest pace, investment in mature economies is not only picking up but its composition is changing from structures towards machinery and equipment. That helps a lot more to revive productivity growth. As global trade has also recovered, we see China, Southeast Asia, and parts of Latin America as beneficiaries, through greater exports to the rest of the world.

Moreover, in addition to creating jobs and more investment, growth is becoming qualitatively stronger. The Conference Board’s growth projections show a greater role being played by skill improvements in the workforce, digitization, and better productivity growth.

So the question is perhaps not so much whether the glass is half full or half empty. Rather it is, what is the glass filled with? The qualitative growth factor will make the current state of the global economy, while slower than we have become used to, more sustainable for a longer period to come.