The global economy is slowing. There are many contributing factors, including weaker performance in Europe and China, growing trade tensions and the impact of a strong dollar. These headwinds are unlikely to disappear soon.
In late September President Donald Trump imposed a 10% US tariff to $200bn of Chinese imports. Sino-US economic relations are likely to continue to deteriorate, the bilateral trade deficit will continue to expand, and dollar strength will constrain world trade growth.
But looking across small advanced economies – helpful indicators for the health of the world economy – suggests this is more a moderation in economic momentum than a marked slowdown. The global economic recovery endures, even if it is not as synchronised or strong as at the start of 2018.
Small advanced economies continue to outperform larger economies in spite of their exposure to a more complex international environment. GDP growth across the group – which includes Switzerland, Norway, Ireland, Singapore, Denmark, Sweden, the Netherlands, Austria, Hong Kong, Finland, Belgium, New Zealand and Israel – was 2.9% in the year to the second quarter, a pace they have maintained since the third of quarter of 2016. This is well ahead of average GDP growth in the G7 (2.2%) and the European Union (2.1%).
Eight of the 13 small advanced economies are growing at a rate of 2.8% or higher. Multiple small economies have been at or above 3% growth for several quarters. They are responding effectively to emerging challenges. The UK, in comparison, grew at just 1.3% on the back of costs and uncertainties related to its imminent EU departure.
Nonetheless, recent small economy data confirm a softening in the global economy. On an annualised basis, GDP growth in the second quarter of this year slowed to little above 2%. Monthly merchandise trade data show a continuing growth slowdown since the start of 2018, in line with dynamics in world trade growth, although small economy export growth remains robust (more than 8% in dollar value terms in July).
This slowing should be kept in context. Although economic momentum is off the peaks of 2016 and 2017, it is stronger than it has been for much of the post-crisis period. Business and consumer confidence, export growth, industrial production, and purchasing managers’ index readings across small economies are generally solid and compare well to larger economies.
There is some geographic variation. The two small economies with the weakest quarterly GDP growth readings in the second quarter were Singapore and Hong Kong, reflecting their acute exposure to Sino-US tensions. The escalating trade dispute is clearly having an impact, although it is not yet systemic.
The general resilience of small economies heavily exposed to the machinations of the world economy suggests the global recovery remains in good shape, though risks remain. Aside from tensions between Washington and Beijing, policy-makers must grapple with continuing euro area challenges (such as in Italy) and pressures from a strong dollar on emerging markets, to give but a few examples. A decade on from the collapse of Lehman Brothers, markets should not be complacent about financial risks, from record levels of debt as a share of GDP around the world, to stretched US equity markets and market distortions from the hunt for yield. As interest rates move up, stress is likely to emerge.
That small economies are travelling reasonably well is an encouraging signal on the health of the global economy. But these economies understand from experience that storms can appear quickly, and there is an emerging consensus that a recession will occur by 2020. An economic, financial or political shock may have an outsized effect on the global economy if it interacts with already slowing global growth. Small advanced economies are a good place to watch for changing global weather.
David Skilling is Director of the Landfall Strategy Group, a Singapore-based economic advisory firm.