The unsung hero of the current global expansion

Our BlackRock Growth GPS shows the synchronized global expansion carrying on into 2018, with developed market (DM) growth serving as the main engine powering the cycle further.

Within developed markets, there’s an unsung hero in the global economy’s recent performance: Europe. The strength of Europe’s rebound in 2017 was one of the year’s biggest macro surprises, with gross domestic product (GDP) growth reaching a robust nearly 3% annual rate. Growth expectations were revised up repeatedly, while some sentiment measures soared to record highs as investors started to embrace the more upbeat growth outlook.

We have broken global growth down into regional drivers, based on composite purchasing managers’ indexes (PMIs), to get a better handle on which region is doing the cyclical heavy lifting at any given moment. See the chart below from our Global macro outlook Heating up, slowly .

Each region reflects activity levels relative to its trend—in other words, which are contributing more to the global cyclical upswing and which are lagging in their cyclical upswing contribution.

The U.S. propped up global growth between 2012 and 2015 and provided something of a cushion against negative shocks, whether from the eurozone in 2012–2015 or China in 2014–2015. Yet over the past two years Europe has proved the only constant source of growth support, though all regions were contributing to growth by 2017, reflecting the synchronized nature of the expansion.

We expect Europe to be another solid contributor in 2018, with bigger investment helping solidify the pace of growth and a further rebound in borrowing and lending giving the eurozone expansion more room to run. The U.S. will also likely outperform thanks to fiscal stimulus . That should give a lift to emerging markets excluding China. We see China’s economy cooling a tad due to its deleveraging efforts. But a mild slowing from high levels should not have major repercussions for the broad emerging market (EM) expansion, we believe.

The chart also shows that this expansion has not been all about China and commodities. China is certainly important due to its size. But our work suggests DM growth has historically affected EM non-commodity economies more than commodity ones. China influences the commodity producers more. This suggests the growth spillovers to the EM world from last year’s growth pickup in developed markets and China will likely run on in 2018.

Corporate investment is a key channel for these spillovers, and we expect a further business investment upswing thanks to U.S. fiscal stimulus and Europe’s recovery. This should make the growth spurt from investment, global trade and EM production more self-reinforcing. We also find that stronger DM capital spending tends to lead a pickup in world trade activity by about one to two quarters. We estimate that any 1% increase in DM investment lifts EM exports by about 0.5 percentage point. This is another key reason why we have confidence in the expansion’s durability at this stage.

The major risk to our view: rising U.S. protectionism disrupts the deep economic and financial integration that is the core of this expansion’s durability. Read more macro insights in our Global macro outlook .

Jean Boivin , PhD, is head of economic and markets research at the BlackRock Investment Institute. He is a regular contributor to The Blog .

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