I have, for some time, argued that the manufacturing should be gaining some traction before too long. My eye has been on ‘early-cyclical economies’, such as Taiwan to find some evidence for that. Fortunately, recent confidence data in advanced economies has started to confirm an improvement in manufacturing.
This is not to say that we expect the eurozone economy to show accelerating growth, but at least it suggests that risks around our forecast are not skewed to the downside anymore.
Han de Jong Chief Economist
- Manufacturing PMIs showing consistent improvement in October
- Risks to eurozone growth more balanced
- US GDP shows meaningful acceleration in Q3
- CETA was agreed, but trade deals remain highly unpopular. This is not good
The preliminary purchasing managers indices for the manufacturing sector in the US, the eurozone and Japan all show in improvement, above general market expectations, for October. And the world trade indicator of the Dutch CPB improved in August after a weak period. It is early days yet and one should not get overly excited, but at least, and at last, a consistent picture is emerging that also fits in with the line of argument I have followed.
That argument is based on a few considerations. First, it is clear that the inventory cycle, most clearly perhaps in the US, has been a drag on overall growth in the last four or five quarters, but that a turn should be close. Second, the decline in commodity prices, in particular oil prices, between the middle of 2014 and the beginning of 2016 has sharply reduced investment in the sector and been a drag on global growth (although the windfall to consumers has been a positive, of course). Given the more favourable trend of oil prices since January, this drag should be gradually easing. Third, manufacturing should be benefitting from targeted stimulus the Chinese policymakers are providing. And fourth, the industrial sector should benefit from an upturn in the ICT cycle globally. These four driving forces are largely independent, which increases the chance of success.
In addition to the specific manufacturing confidence indices, the authoritative German business confidence index, the Ifo, also surprise on the upside in October. The forward looking expectations component reached its highest level since mid-2014. This is not to say that we expect the eurozone economy to show accelerating growth, but at least it suggests that risks around our forecast are not skewed to the downside anymore.
Third quarter US GDP numbers showed that the pace of economic growth has accelerated. Growth amounted to 2.9% (annualised) in Q3, against just some 1.0% on average in the previous three quarters. This was good news and confirms the view we have held for some time.
CETA scraped through, but what is it with trade deals?
Negotiations about the Canada-EU Trade Agreement (CETA) started in 2007 and have now been concluded with the regional leaders in Belgium the last ones to agree the deal. The last-minute opposition from Wallonia raises important questions about international trade deals. It is not the first time something like this happens. There is broad opposition against TTIP (the proposed trade deal between the US and the EU) and TPP (the proposed deal among 12 countries of the Pacific rim, but excluding China). In a sense, the Dutch referendum on the EU’s association treaty with Ukraine (where that treaty was rejected in an advisory referendum) and the UK’s decision to leave the EU are expressing the same sentiments. There are also clear examples in the US presidential election campaign showing that even existing deals are condemned.
The question I would like to raise is why these trade deals, international cooperation and integration in general are so disliked by so many people. Economic theory is quite clear about international free trade: it is very advantageous as it stimulates the international division of labour and thereby raises living standards. There are a couple of possible answers to the question why these deals are so unpopular. First, it is conceivable that the deals are actually bad and the opponents are right. Being against a particular deal does not necessarily imply that someone is against free trade. But it would be surprising if all the existing and proposed deals are actually bad deals.
There must be a more plausible answer. In my opinion, the advantages of such deals are very significant, though I must admit that international free trade also causes pain and casualties. The number of people who benefit from trade is huge and their individual benefit may not be quite so huge. It may also not be very clear to them that a certain part of their standard of living is due to international trade. On the other hand, while the number of people feeling the negative effects is small, their individual pain can be large (loss of a job) and can sometimes be directly linked to international competition. So the negative effects are more visible.
A third possible reason why trade deals are unpopular is that many people feel that these deals are negotiated in back rooms with some stakeholders present who may have a big influence on the content of the deal. People nowadays demand transparency and may feel uncomfortable with how these deals are done. A fourth possible reason is that trade deals were easy when trade in goods dominated. But services play an ever more important role and this may complicate such deals.
Fifth, growth in advanced economies is slow and parts of the population feels hard done by, whether that is justified or not. They are looking for a scapegoat and international trade is a nice and easy target for their anger. In my opinion, putting in place limits to international trade is the completely wrong way to go about trying to raise the economic growth rate. So I hope that we can overcome scepticism about globalisation, trade deals and international trade at large. It will take leadership, courage and convincing on the part of our political leaders to keep (or bring) the majority of the people on board.