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May 27, 2017

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Recovery at last for developed world

After five years and several false starts, the rich world may have finally reached a milestone in its long journey to recovery from the global financial crisis.

A recent slew of upbeat data points to a synchronized rebound of developed economies this year as healthier consumers and firms join forces with continued central bank stimulus.

Leading the pack is the United States. Its housing market, the epicenter of the sub-prime mortgage implosion in 2008, has bounced back so sharply in areas such as southern California and Las Vegas that talk has surfaced of a new bubble.

Europe, which kept tripping up on its potholes of public debt, is also looking steadier than it has in years. The euro area officially exited its longest recession in the second quarter, boosted by stronger factories, exports and consumption spending.

While high unemployment and uneven performances are still an issue, the region's better business activity is expected to spill over to Britain, where growth accelerated in the second quarter on the back of broad-based expansion.

While economic growth in Japan slowed in the April-to-June period, a weaker yen and rising domestic demand are boosting company profits and helping to finally defeat endemic deflation.

What all this adds up to is that developed economies will add more to growth this year than emerging ones for the first time since 2007, according to a report in the Wall Street Journal this week citing research by hedge fund Bridgewater Associates.

Why has 2013 proved to be the year of economic resurrection for the developed world? Two reasons stand out.

First, the U.S. recovery is turning out to be the rising tide that lifts all boats. The prospect of improved demand from the world's largest economy is supporting manufacturing from the eurozone all the way to Singapore.

"The external environment is really getting better, led by signs that U.S. demand is picking up," said Nick Kounis, head of macro research at ABN Amro Bank.

The U.S. recovery, in turn, owes much to central bank boldness -- the second key reason for the turning point occurring this year.

Apart from the U.S., most other major advanced economies have recently acquired new central bank governors, whose shock-and-awe tactics have jolted their economies back to life.

Europe's Mario Draghi succeeded Jean-Claude Trichet, whose premature interest rate hikes halted a fledgling recovery in 2011. It was Draghi's pledge last year to "do whatever it takes to preserve the euro" that finally got through to investors, who stopped pressuring European bond yields to crisis points.

Draghi's words, of course, didn't lift growth directly. Still, they have bought Europe's governments time to cut budget deficits and make the reforms necessary to spark economic revival, in the process removing the uncertainty around the survival of the euro that weighed on global growth.

Similarly bold assurances are boosting the growth prospects in Japan and Britain, which have both changed central bank heads in the past 10 months.

Japan's Haruhiko Kuroda unveiled more money printing, a first-ever explicit inflation target, and a steely determination to beat deflation and stagnation.

This month, Britain's Mark Carney also made an unprecedented vow to keep interest rates low until the job market improves, as long as consumer prices and the financial system are stable.

The progress of advanced nations is good news for emerging economies in Asia and Latin America -- where roaring growth has slowed on rising interest rates, tighter credit and weaker commodity demand -- but perhaps not to the same extent as before.

Richard Hoey, chief economist of American bank BNY Mellon, expects that "improved economic activity in the developed economies should help stabilize the emerging country economic growth rates."

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