Photo: MARK RALSTONMARK RALSTON/Agence France-Presse/Getty Images
Global Risks Begin to Recede
It isn’t just the Trump effect; from oil prices to Chinese outflows, the world is looking up
By Greg Ip
It’s tempting to see surging U.S. stock prices and business confidence as all coming in response to President Donald Trump’s election.
But the upswing is global: In Europe, Japan, China and elsewhere, business surveys and markets have turned markedly more optimistic.
This is partly because investors hope that any fiscal stimulus Mr. Trump enacts will spill over to other countries. Yet a confluence of other factors is also at work: Oil prices are on an upswing thanks to production cuts by the Organization of the Petroleum Exporting Countries. Chinese and European economic activity picked up in the second half of last year. And, economically speaking, populism has so far been a wet firecracker.
“It’s a mosaic,” said Ed Hyman, chairman and economist at Evercore ISI, a brokerage firm. “Trump is the most discussed part of the mosaic but not necessarily the most important part.”
A few weeks after Mr. Trump’s election, OPEC agreed to cut production and its member countries have largely abided by their pledges. Oil prices, which fell below $30 a barrel a year ago, have remained above $50 since the agreement. As a result, the number of oil and gas drilling rigs operating in the U.S. has jumped 80% since June, according to Baker Hughes, an oil field services company.
Oil and gas field machinery production is up 10% since August.
Firmer energy prices have pushed actual and expected inflation higher. U.S. inflation hit a five-year high in January. Ordinarily that’s bad, but it is now welcomed by central bankers who worried that too-low inflation can easily become destructive deflation. In mid-July bond markets expected inflation in five to 10 years’ time to average 1.2% in the U.S., 1.4% in the eurozone, and 0.1% in Japan. Those figures have since jumped roughly half a percentage point.
Mohamed El-Erian, an adviser to the German insurance company Allianz, thinks the OPEC agreement will likely keep oil between $50 and $60 a barrel. He said that plus hopes for fiscal stimulus under Mr. Trump and a Federal Reserve continuing to err on the side of raising rates too slowly, rather than too quickly, are why expected inflation has risen.
Global growth is also on a firmer footing. A year ago, as China struggled to stem surging capital outflows and a weakening currency, an index of economic activity compiled by IHS Markit slipped into contractionary territory. Then Chinese authorities encouraged banks to crank up lending and clamped new controls on capital outflows. By December, the borrowing boom had driven the index to nearly a four-year high.
Evercore ISI projects annual growth in nominal Chinese gross domestic product—economic growth plus inflation—will reach 11% in the current quarter, up from below 7% a year earlier. This growth traditionally has correlated closely with oil and industrial prices.
Even Europe shows signs of shaking off its torpor. “Relative to expectations in October, Europe is much stronger both in terms of real business volumes and upside surprises on inflation than the U.S.,” said Jason Thomas, director of economic research at Carlyle Group, a private-equity manager. From 2009 to 2014, all of Europe’s growth came from exports. In 2015, the commodity price plunge battered exports and domestic spending carried growth. “You finally have the domestic economy holding its own at the same time you’ve seen a rebound in orders from emerging markets and the globe more broadly,” he said.
The improved outlook for inflation and growth has taken the pressure off central banks in Europe and Japan to lower interest rates further or increase bond buying, and this week Fed Chairwoman Janet Yellen said the bank could raise rates again in coming months. This comes as a relief to commercial banks, whose lending margins have been squeezed by zero to negative rates.
Finally, political uncertainty hasn’t been the confidence killer that many feared. Britain’s vote to leave the European Union has damped business investment plans but consumers have shrugged off the uncertainty. Mr. Trump has prioritized rolling back regulations; he has yet to act on his harsh protectionist rhetoric. In meetings with the prime ministers of Japan and Canada this week, Mr. Trump praised economic ties with the two. His administration is exploring alternatives to branding China a currency manipulator.
Whether the world can sustain this increased confidence remains to be seen. The global economy is still likely to grow just 3.4% this year, according to J.P. Morgan, better than last year but in line with the sluggish trend of the prior five years.
While political uncertainty hasn’t hurt much yet, that could change if the anti-euro National Front wins France’s presidential election this spring. China may owe its growth rebound to a debt bubble that could soon burst. Mr. Trump’s tumultuous presidency could make tax cuts harder to pass while providing ample opportunity for geopolitical shocks.
Still, after a year when worst-case scenarios seemed all too plausible, a return to a modest normal is cause for relief.