“Global synchronized growth” has been a popular buzzword for several months. It means what it says: The world’s largest economies are all growing at the same time. According to the International Monetary Fund, the US, China, Germany, France, the UK, Japan, and India all grew by more than 1.5% in 2017—the first time that has happened since 2007
Because these countries do so much trading with each other, growth in one reinforces growth in the others. Jay Bryson of Wells Fargo explained:
“The U.S. expanding causes European exports to strengthen, causes their economy to strengthen, which feeds back and leads to higher demand for our exports. For the U.S. that effect is relatively small, but for other countries, those feedbacks on a global basis can be very, very important.”
Global synchronized growth has investors drooling. Many firmly believe that, due to strong global economic conditions, the current bull market can and will last for at least several more years.
But can the good times really last?
With the exception of unforeseeable geopolitical events—a war in East Asia, a Eurozone breakup, a major oil price shock—the most important factors supporting globally synchronized growth center around the US economy.
As the custodian of the US dollar and the center of world financial markets, the world begins and ends in Washington and New York. Volatility in the dollar’s value or a liquidity crunch could throw the global growth cycle out of whack. Here are the biggest risks.
The Risks to Global Synchronized Growth
Central Bank Tightening – There’s a lot of speculation the Federal Reserve will accelerate its interest rate increases under new Chair Jay Powell. Some are concerned President Trump’s policies—which have resulted in ballooning government debt and possible inflation down the road—will overheat the economy and force the Fed to take stern action.
If the Fed did raise interest rates sharply, liquidity would become scarce worldwide, potentially throwing the global economy into a tailspin. A miniature version of this happened in 2013 when the Fed started “tapering” off the pace of its Quantitative Easing program.
Over-indebtedness
This is a global problem that never really seems to get smaller. It’s good news the US, UK, and Eurozone are all growing at faster rates, but debt levels (both of the private and public sort) are still disturbingly high—and they’re getting higher in the US. Even Canada and Australia are sitting on what looks like massive housing bubbles.
Speaking of bubbles, China is in one. Central government intervention has distracted investors from the country’s massive public sector debt bubble, but as growth slows down—and it is indeed slowing down—that will get increasingly difficult. Contrary to what some protectionists believe, a growing, prosperous China is good for the US and the rest of the world.
Dollar Volatility
Investors aren’t sure whether the US dollar is primed to gain or lose value in the coming months, but they tend to agree that it won’t stay put.
There’s a lot of speculation the Trump tax bill—which aims at repatriating corporate profits held offshore—will send the greenback shooting upward. With multinationals pulling dollars out of international money markets and stuffing them back into the US, dollars are about to get scarce. That would push the dollar’s value up on forex markets.
However, there’s also reason to believe the dollar could go shooting the other way, especially given the recalcitrance of Democrats in Congress. The recent “Schumer Shutdown” reminded investors how difficult it is to do business in Washington these days. The dollar plunged to a three-year low during the shutdown as investors lost confidence in Congress’s ability to pass a budget.
Moreover, the Euro has gained value against the dollar of late, now trading at EUR1/USD1.2415—up 6.9% over the past three months.
A dollar rapidly losing value against other currencies would lead to de-synchronization—the US would buy fewer imports, and major exporters like China, Japan, and Germany would get hit.