Economic and political cycles have a habit of being out of sync. Just ask President George H.W. Bush, who lost the presidential election in 1992 because voters blamed him for the recent recession. Or Chancellor Gerhard Schröder of Germany, booted out by voters in 2005 after imposing painful reforms, only to see successor Angela Merkel reap the rewards.
Today, almost 10 years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last under way. In America, Europe, Asia and the emerging markets, for the first time since a brief rebound in 2010, all the burners are firing at once.
Nonetheless, the political mood is sour. A populist rebellion, nurtured by years of sluggish growth, still is spreading. Globalization is out of favor. An economic nationalist sits in the White House, and this week all eyes were on Dutch elections featuring Geert Wilders, a Dutch Islamophobic ideologue, only one of many European malcontents.
This dissonance is dangerous. If populist politicians win credit for a more buoyant economy, their policies will gain credence, with potentially devastating effects. As a long-awaited upswing lifts spirits and spreads confidence, the big question is: What lies behind it?
The past decade has been marked by false dawns in which optimism at the start of a year has been undone—whether by the euro crisis, wobbles in emerging markets, the collapse of oil prices or fears of a meltdown in China. America’s economy has kept growing, but always into a headwind. A year ago the Federal Reserve expected to raise interest rates four times in 2016. Global frailties put an end to that hope.
Now things are different. This week the Fed raised rates for the second time in three months—thanks partly to the vigor of the American economy, but also because of growth everywhere else.
Fears about Chinese overcapacity, and of a yuan devaluation, have receded. In February factory-gate inflation was close to a nine-year high. In Japan in the fourth quarter, capital expenditure grew at its fastest rate in three years. The euro area has been gathering speed since 2015. The European Commission’s economic-sentiment index is at its highest since 2011, and euro-zone unemployment is at its lowest since 2009.
The bellwethers of global activity look sprightly too. In February South Korea, a proxy for world trade, notched export growth above 20 percent. Taiwanese manufacturers have posted 12 consecutive months of expansion.
Even in places inured to recession, the worst is over. The Brazilian economy has been shrinking for eight quarters but, with inflation expectations tamed, interest rates are falling. Brazil and Russia are likely to add to global GDP this year, not subtract from it. The Institute of International Finance reckons that in January the developing world hit its fastest monthly rate of growth since 2011.
This is not to say that the world economy is back to normal. Oil prices fell by 10 percent in the week to March 15, on renewed fears of oversupply, and a sustained fall would hurt the economies of producers more than it would benefit consumers. China’s build-up of debt is of enduring concern. Productivity growth in the rich world remains weak. Outside America wages are still growing slowly, and in America surging business confidence has yet to translate into surging investment.
Entrenching the recovery calls for a delicate balancing act. As inflation expectations rise, central banks will have to weigh the pressure to tighten policy against the risk that, if they go too fast, bond markets and borrowers will suffer. Europe is especially vulnerable, because the European Central Bank is reaching the legal limits of the bond-buying program it has used to keep money cheap in weak economies.
The biggest risk, though, is the lessons politicians draw. President Donald Trump is singing his own praises after good job and confidence numbers. It is true that the stock market and business sentiment have been fired up by promises of deregulation and a fiscal boost. However, Trump’s claims to have magically jump-started job creation are sheer braggadocio. The American economy has added jobs for 77 months in a row.
Most important, the upswing has nothing to do with Trump’s “America First” economic nationalism. If anything, the global upswing vindicates the experts that today’s populists often decry.
Economists long have argued that recoveries from financial crashes take a long time: Research into 100 banking crises by Carmen Reinhart and Kenneth Rogoff of Harvard University suggests that, on average, incomes get back to pre-crisis levels only after eight long years. Most economists also argue that the best way to recover after a debt crisis is to clean up balance sheets quickly, keep monetary policy loose and apply fiscal stimulus wherever prudently possible.
Today’s recovery validates that prescription. The Fed pinned interest rates to the floor until full employment was in sight. The ECB’s bond-buying program has kept borrowing costs in crisis-prone countries tolerable, though Europe’s misplaced emphasis on austerity, recently relaxed, made the job harder. In Japan rises in value-added tax have sabotaged previous recoveries, so this time the government wisely deferred an increase until at least 2019.
© 2017 Economist Newspaper Ltd., London (March 18). All rights reserved. Reprinted with permission.
Image credits: Jeff Kowalsky/Agence France-Presse/Getty Images, Emmanuel Dunand/Agence France-Presse/Getty Images, Todd Heisler/The New York Times