Simonomics: The Good-Bad-Ugly of the Global Economy

Simonomics: The Good-Bad-Ugly of the Global Economy

Why you should care

Because your economic outlook is increasingly being impacted by these nations.

Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.

Picture yourself at the racetrack, where two vehicles drive past you. One is a monster-size truck moving along at a steady and measured pace, gently accelerating. The second is a small sports car, which appears to zoom past at high speed. But, as you watch more closely, you begin to notice the car is actually slowing down compared with the truck — so much that you wonder whether it’ll go into reverse. That scene of an acceleration on the one hand and a slowdown on the other is similar to how the global economy will move this year, as far as economists can tell, and there’ll be a world of difference economically depending on where you are.

In the racetrack analogy, the United States and the 19 member countries of the European Union’s single currency area are represented by the truck. They are actually, well, trucking along. “The U.S. service economy is doing well, and the U.S. consumer is in a very strong position,” says Michael Arone, chief investment strategist at financial services firm State Street Global Advisors. He sees U.S. growth staying steady around 2.5 percent this year, just as it was in 2015. He also forecasts improvement in Europe as consumers there spend more while their economy gets the benefit of stimulus from the European Central Bank, with growth overall picking up to 1.6 percent this year, compared with 1.4 percent last year.

Little differences in the growth rates of the U.S. and Europe do make a huge difference to the global economy — and a much bigger one than China.

So where does China’s sluggishness stand in all of this? Its economy is definitely slowing down, though the country makes up less than 15 percent of the global economy, says John Canally, chief economic strategist at broker-dealer LPL Financial, in Boston. “What matters more is the U.S. and Europe,” he adds. Canally is, of course, correct, because together the U.S. and Europe (including the non-eurozone countries) account for close to half of the world’s GDP, according to World Bank data. So while the growth of those regions isn’t exactly fast, little differences in their growth rates do make a huge difference to the global economy — and a much bigger one than China.

Outside of those economic zones, things are slowing down like a decelerating sports car in many emerging-market economies. Brazil has had it worse than most, with economic growth going into reverse. It is suffering from a triple whammy. First, the Chinese slowdown led to falling commodity prices, including those vital to Brazil’s economy, such as iron ore. Then the fallout of the cooling commodity sector meant slipping revenues for the government, which eventually led to a cut in the country’s debt rating. As if that weren’t enough, there’s been a widening corruption scandal surrounding the oil giant Petrobras, shaking the country’s political establishment. The result has been huge declines in the value of the country’s currency, the real, along with higher-than-desired inflation and a contracting economy. Unfortunately for Brazil, the slump will continue in 2016, where GDP is expected to drop 1 percent on top of a fall of 3 percent in 2015, according to risk-analysis firm Dun & Bradstreet.

Yet, with that said, economics as a science is still barely a toddler in the field of learning when compared with other disciplines like mathematics. After all, Adam Smith introduced it in 1776, whereas the science of numbers goes back thousands of years. That relative youth may explain the skepticism some have toward its practitioners, best summed up with this quip: Economists were invented to make astrologers look good.

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