The rate of global economic growth is meaningless
As the world economy splinters, broad measures of its condition are becoming less relevant
EVERY now and then an economic concept must be gracefully retired. My latest nomination for this honour is the notion of a “global rate of economic growth”.
A meaningful definition of a global rate of economic growth requires that a fair number of countries, or at least a preponderance of global gross domestic product, moves in the same direction at a broadly common and even intertwined rate. This idea once made sense, as often there were a few common factors – Chinese-driven growth, for example, or energy prices – that affected a large number of countries in similar ways. In the future, however, economic growth will increasingly come from idiosyncratic and nation-specific factors, not global ones.
Consider China first. For most of the last several decades, Chinese economic growth ran at 8 per cent or higher. And with all its construction projects, the Chinese economy had a voracious demand for commodities and raw materials. So there were a lot of booms across the world, from the soybean fields of Brazil and Argentina to the machine-tool factories of Germany and the dairy farms of New Zealand. Not everything in those economies grew in proportion, but there was a basic floor, because at least a few export sectors were booming and creating new jobs.
As a secondary effect of that growth, Chinese capital flowed outward, most notably as part of the Belt and Road Initiative. Chinese investors put up money for a broad variety of infrastructure projects, mostly to China’s west, including ports in Sri Lanka, railroads in Ethiopia and roads in Central Asia. Some of that money was wasted, but many of those countries got infrastructure and jobs out of it, the first of which will last and the second of which was temporary.
China is large enough, and was growing fast enough, that much of the world grew in its wake. Maybe the US manufacturing belt did not prosper, but there is a reason so many countries became friendly and more attentive to China in the last few decades.
Now things are different. China reports a growth rate in the range of 5 per cent, but most observers do not trust those numbers. The yuan is weak, consumer prices are falling, real-estate excesses are still unwinding, exports are slumping and the government has stopped reporting youth unemployment rates because they are so high. Longer-term problems include an ageing country and a shrinking labour force.
The bottom line: Whatever the true rate of Chinese economic growth, it is not enough to drive the global economy.
The second systemic factor that used to drive the global economy is oil prices. When they were high, sometimes due to geopolitical factors, much of the global economy would enter recession, as was the case in 1973 and 1979. Today the energy landscape is entirely different. The United States has become a major oil exporter, so high oil prices are much less of an economic negative for the US economy – and can even be a positive.
The European Union (EU), meanwhile, recently lived through a major energy shock after losing its supply of natural gas from Russia. But European nations responded by conserving more and switching to a mix of other gas sources and renewables. There was strong negative economic pressure, but the EU economies held up surprisingly well. China is also aware of its dependency on foreign oil and gas, and is moving rapidly to develop more solar, nuclear and, sadly, coal.
The point is that the world economy is far less vulnerable to energy price shocks now than it used to be, and this trend will only continue with the rise of cheaper solar and wind power. So another systematic force on the global economy – the price of fossil fuels – has been weakened. Many poor nations will still suffer greatly when oil and gas prices rise, and the humanitarian costs there can be high. But the economic effect will not be enough to drive a broader global recession.
In this new world, with these major common shocks neutered, a country’s prosperity will be more dependent on national policies than on global trends. Culture and social trust will matter more too, as will openness to innovation – and, as fertility rates remain low or decline, so will a country’s ability to handle immigration. A country that cannot repopulate itself with peaceful and productive immigrants is going to see its economy shrink in relative terms, and probably experience a lot of bumps on the way down.
At the same time, excuses for a lack of prosperity will be harder to come by. The world will not be deglobalised, but it will be somewhat de-risked. Dare we hope that these new arrangements will produce better results than the old?
