The good news for the world economy

The world economy is going through a phase of slow but continuous recovery. This is a very positive sign. The words of Jim O’Neill, the English economist and former president of Goldman Sachs Asset Management, who many continue to remember, especially for having coined, in 2001, the acronym Brics to refer to what were then the four major emerging economies: Brazil, Russia, India, and China.

The six indicators of O’Neill

Well, from the prestigious Project Syndicate platform, O’Neill explains why we would do well to give more weight to the positive signals coming from global markets. The British economist is convinced that to have a reliable picture of the overall performance of the economy for a period of six months it is essential to keep an eye on six indicators. Three relate exclusively to the United States, and it is the rate of unemployment, industrial productivity, and quantity of new orders, which are a direct stimulus for companies. If the unemployment rate is low and the other two values are good, the American economy is healthy.

The fourth indicator concerns China, and in particular the country’s spending capacity in relation to total industrial production (adjusted for the rate of inflation). If domestic spending remains high despite all the difficulties the country is going through, then we can rest assured of the health of the main Asian market. South Korea’s trade flows also deserve to be kept under review, for two reasons. Firstly, the government is very efficient and updates them on a monthly basis. Then Korea has good trade ties with everyone (Europe, Asia, and the United States), so if the trade figures are positive it means that the economy, in general, is not suffering.

The latest indicator to be monitored is the German Ifo Business Climate Index, an index that is updated every month and that, by virtue of the centrality of the German economy in Europe, can ‘help to better understand what is happening in the markets of the Old Continent.

Forecasts for 2018

Well, if already in mid-2017 all these indicators were encouraging, it is comforting to note that at the beginning of 2018 they were further strengthened. South Korea’s exports grew by 15.8 percent, and now that the Euro crisis has been substantially overcome and commodity prices have stabilized, world trade is expected to increase further. 

The manufacturing activity index has improved in the United States and also in many other countries, and this is also a very encouraging sign, while for China the medium and long term forecasts are very good and much better than in previous years. This is a very positive picture that confirms the growth estimates for global GDP at 4%. On the contrary, according to O’Neill, these forecasts could be revised upwards already in the first months of 2018.

Problems to be solved

However, be careful: such a positive picture must not lead us to think that all the problems that have remained unresolved for years have been solved. Almost all central banks have tried to support their economies with particularly generous monetary policies. If the global economy continues to grow at a fast pace, many credit institutions may decide to impose progressively higher interest rates, and the consequences of such a move on a global scale are difficult to predict.

To avoid the worst, O’Neill believes that two things should be hoped for: the first is that the world’s productivity rate will continue to rise because that would be the best way to cope with the consequences of a restrictive monetary policy in a relatively high growth environment. The second is to hope that the various political crises, which for months have been on the verge of breaking out slowly, will return, thus avoiding further upheavals with potentially disastrous consequences.

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