Developed Economies Expand in the Third Quarter

With most emerging markets continuing to record lower levels of economic growth than in previous years, developed economies have been forced to play a greater role in driving growth for the global economy.  Unfortunately, most developed economies have also recorded disappointing rates of growth during this period, as their recoveries from the global financial crisis have been less than robust.  Two factors are largely to blame for this disappointing growth.  First, the growth ceilings that determine how high economic growth can go before an economy overheats have fallen by at least 25% in most developed economies over the past ten to 15 years.  Second, the external environment facing developed economies has worsened significantly as a result of declining levels of export competitiveness and a slowdown in growth in many key export markets.  Add to these factors the relatively low level of business and investor confidence in many developed economies and it is easy to see why so many developed economies are struggling to return to pre-crisis levels of growth.

For the world’s largest developed economy, the United States, the first half of 2016 proved to be a bitterly disappointing period as a hoped-for surge in growth failed to materialize, resulting in the US economy growing by just 1.1% on an annualized basis over the first six months of this year.  However, growth soared in the third quarter in the US, with GDP growth rising to 2.9% on an annualized basis, the highest rate of growth in the US in two years.  This growth was driven by a continued increase in consumer spending as well as a rebound in export growth, despite the fact that many of the US’ key export markets remain weak and the US dollar remains strong.  This surge in growth in the third quarter has raised hopes that the US economy can finally break out of its recent period of relatively sluggish growth and began to grow at a rate of more than 3% over a prolonged period of time, something that it has not done in over a decade.  Interestingly, this was the last major piece of economic data that will be released in the United States ahead of its highly contentious elections that will take place next week, and it remains to be seen if this surge in growth in the third quarter will have an impact on these elections.

In the European Union, the economic recovery that has been underway since early 2015 appears to be slowly running out of steam and there are a number of factors that are in place that will likely result in slower growth in the EU in the coming months.  In the third quarter of this year, the EU’s economy expanded by 1.8% on a year-on-year basis.  In fact, since the beginning of 2015, the European Union’s economy has expanded at or near 2%, as it appears that the EU’s growth ceiling has fallen to around that level due to demographic constraints and lack of economic competitiveness among many of the leading economies in Europe.  On the positive side, a weak euro has helped to boost export growth for many economies in Europe, while more competitive economies on Europe’s periphery (such as Britain, Spain and Poland) have remained the drivers of EU economic growth in recent years.  Unfortunately, the outlook for economic growth in Europe is deteriorating as many of these peripheral economies face severe turmoil in the coming months, while too many European economies continue to not do enough to improve their economic competitiveness in order to boost their ability to attract investment and increase exports.

Emerging market economic growth is not forecast to improve significantly over the near-term as China’s economy continues to slow and many key emerging markets remain in major slumps, so developed economies will continue to have to play a greater role in driving growth for the global economy.  However, lower growth ceilings will prevent the world’s leading developed economies from returning to the levels of growth that they had been able to achieve in previous decades.  In the United States, economic growth is likely to continue to accelerate over the near-term, but it has been more than a decade since the US was able to record consistent rates of economic growth of more than 3%, limiting the US’ ability to boost the global economy.  In Europe, the region’s economic recovery appears to have already peaked at just around 2% and growth rates are forecast to trend downwards over the near-term, as Europe’s leading economies are unable to sustain higher rates of growth. 

Overall, developed economies will contribute a little more to global growth over the near-term, thanks largely to an improving outlook for the US economy, but this will not be enough to significantly boost overall global economic growth rates that have been stuck at near 3% over the past five years.