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America’s economic expansion could just keep going

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By David Bassanese
 
Could America be set to enjoy one of its longest economic expansions on record?

Maybe, just maybe.  Let me tell you why.

For starters, there has been a notable lift in global economic momentum since around mid-2016, after global growth downgrades through 2014 and 2015.

Why the turnaround?

We can point to a few factors. For starters, a belated tightening in OPEC oil production opened the door for renewed US investment in the energy sector (which has kept global oil prices frustratingly low for all producers).  As part of its latest Five Year Plan in late-2015, China also flicked the switch back toward growth-orientated policies, which saw infrastructure and housing related construction rebound – in turn fuelling the 2016 surge back in iron-ore prices.

More generally, low energy prices are supporting consumer spending across the US, Europe and Japan, as is reduced drag from earlier fiscal belt tightening.

Last, but not least, the hopes of greater US fiscal stimulus under US President Trump – together with less regulation - has likely sparked a greater degree of “animal spirits” among the global business community.

So far so good, but can it last?  Here’s where developments get even more encouraging.

It is common for investors to think that long economic expansions – such as the global economy is enjoying at present – tend to die of old age.  After all, all expansions eventually end in a downturn – so the longer an expansion continues, the higher apparent probability that a slump could be just around the corner. Rising levels of debt could be one such catalyst, as might a rise in wage and price inflation and labour markets tightening.

That said, there are some promising signs that the present global recovery could continue for a while longer – and may even enjoy a second wind.

The grounds for such optimism were contained within an interesting recent speech by Reserve Bank Assistant Governor (Economic) Luci Ellis.

Note America’s present economic expansion is now around 80 months – which is relatively long by historical standards.  Yet despite this longevity, Ellis points to research from the US Federal Reserve which indicates that the length of US expansions since World War Two have varied widely, and even though the current expansion is above average, there are three expansions that have been even longer.
 

In short, over a period of at least the first 10 years, history suggests the probability of a US expansion ending anytime soon does not appear overly affected by its current age.

A further encouraging feature noted by Ellis is that, while in some counties – such as China – leverage has increased notably, this has not been a global-wide phenomenon.  We’ve certainly not – as yet - seen the global build-up in leverage evident prior to the 2007-08 financial crisis.

And lastly, while labour markets have tightened in many countries, the next leg of growth could come from a lift in business investment, as companies try to overcome growing labour shortages by belatedly boosting still-weak levels of productivity.   As Ellis notes, “productivity itself can be cyclical..it's not clear [current weak levels of productivity growth] ..will continue once spare capacity in these economies has been fully absorbed.” Tentative signs of this are becoming evident with a lift in business investment across several regions.


Indeed, there’s a risk we could be living through a re-run of the 1990s – which saw the longest US post-war expansion on record (10 years).  Ellis notes that the 1990s was in fact similar to today in that that “considerable innovation seemed to be happening, but this took a while to be evident in the productivity data. This is because firms take a long time to adapt their business models and processes to the new technologies.”

How delicious a prospect would it be for America’s current economic expansion to last at least as long as that of the 1990s?  If it could, we’d be set to enjoy at least another three years of decent global growth and likely rising equity markets.

Published: Wednesday, September 27, 2017


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