What if everything started to go right in the world economy?
It’s a lot to ask. The 1.1 percent global growth of the first quarter was the weakest for an expansion since 1998, according to JPMorgan Chase & Co. Former U.S. Treasury Secretary Lawrence Summers’s “secular stagnation” warning is gaining traction and central banks are finding more and more reasons to keep monetary policy easy.
That’s nevertheless not stopping Simon Cox, Asia Pacific investment strategist at BNY Mellon Investment Management, from thinking that “preoccupation with pessimism would seem to leave a gap in the intellectual marketplace to ponder what might go right.”
So curious was he that he teamed up with the Economist Intelligence Unit to compute just what would happen if everything in the big economies of the U.S., Japan, China and India all took off at the same time. Together they account for almost half of global gross domestic product.
“If these four economies were to fire on all cylinders at the same time, it would lift growth and trade in the rest of the world, reverse the slide in commodity prices and underpin a further rally in global share prices,” Cox said in a report sent to clients this month.
Cox’s simulation assumes Japan manages to average growth of 2 percent for the rest of this decade, the U.S. 3 percent, China 7 percent and India 8 percent.
Such an outlook is not as foolhardy as first appears. In the U.S., for example, the International Monetary Fund is predicting compound average growth between now and 2020 of about 2.5 percent, shooting distance from the 3 percent in Cox’s report.
Moreover, the IMF is often too downbeat. U.S. growth has exceeded its most pessimistic forecast in 16 of the past 24 years, while Japan and India topped it 15 times, according to Cox. China has outpaced the worst outlook in 22 of the last 24 years.
At times, the IMF wasn’t even optimistic enough. U.S. growth surpassed the lender’s highest forecast in one in four of the last 24 years and China did so in 13 years. Economists in the past missed the rebound from the Great Depression and the technology revolution of the 1990s.
Group of Four
There is also room for economies to speed up. The gap between actual U.S. growth and what economists think is its potential was $5.3 trillion over the past seven years -- the equivalent to shutting the entire economy down for 3 1/2 months. The U.S. has operated below capacity in about 60 of the past 80 quarters.
There are also policies authorities could rectify to close such gaps, said Cox. India needs to make it easier to buy land and China for villages to sell it. The U.S. tax code is too complex and India’s is too weak. Companies in China and Japan distribute too few dividends to shareholders, while companies in America probably do too much.
So what would happen if what Cox calls the Group of Four did shift into its top gear? He and the EIU estimate there would be an extra $10 trillion in the group’s GDP in 2020. A further $8 trillion lift would be provided to the rest of the world.
$100 oil would be back and global food prices would surge 40 percent. The Nikkei 225 Stock Index would surpass 24,000 and the Standard & Poor’s 500 would pass 3,000 by the end of the decade.
“We cannot say with any certainty that the G-4 will grow as fast as we outlined,” said Cox. “We are saying that they could.”