We've come a long way
10 years ago this month, the global financial crisis was gathering steam. The US sub-prime market was beginning to crater, there had been a run on Northern Rock in the UK, and US stockmarkets were gyrating on the cusp of halving in value over the subsequent 12 months. These financial sector problems were about to convert into an economic crisis. World GDP growth slowed abruptly from 5% in the year to Q3 2007 to -2% in the year to Q1 2009; the only contraction in global GDP over the past 50 years.
In this context, the IMF’s World Economic Outlook released this past week shows that we have come a long way. Global GDP growth forecasts were marked up to 3.6% and 3.7% for 2017 and 2018 respectively, up by 0.1% from the Outlook released in April, in what is a broad-based recovery. Although growth rates remain below their pre-crisis trend levels, this is a marked improvement. And world trade growth is running at 5% in the year to July; again lower than the pre-crisis trend rates, but well up after a weak post-crisis period.
The group of small advanced economies provide a useful perspective on the global economic journey over the past decade: from crisis, to gradual recovery, to the current acceleration. The small economy experience also provides a reminder of the importance of policy choice in supporting improved outcomes.
Unsurprisingly, small advanced economies were badly hit by the global financial crisis. Small economy GDP growth rates reduced by almost 6% between 2006 and 2007 and 2008 and 2009, compared to an average slowdown of 4% in large advanced economies. Small economies like Singapore and Hong Kong experienced contractions in GDP of around 10% before rapidly returning to growth on strong regional demand.
However, after this sharp growth slowdown through 2008 and 2009, small advanced economies out-paced larger economies. They recovered GDP losses more rapidly, returning to Q1 2008 levels by the end of 2010, and then grew more quickly. Indexed against Q1 2008, GDP is now up 14% in the small economies relative to 11% in large economies. All small economies bar Finland are now above their 2008 levels of GDP; and Finland, the fastest growing Nordic economy through 2017, will likely be above the line within the next year or so.
Of course, some other small economies have done less well. Greece’s GDP level has been around 75% of its Q1 2008 levels for a few years; and with growth of less than 1%, it is not making much progress. And Portugal is still a little short of Q1 2008 GDP levels, although it is growing strongly. However, Ireland, Iceland and the Baltics have recovered well from a deep crisis experience in which GDP contracted by 10% or more.
Small economies are now front-running the global economic recovery. The IMF World Economic Outlook marked up 2017 GDP growth forecasts by 0.5% across the small advanced economies group (relative to the April forecasts), compared to a 0.2% upgrade for the large economies group. Every small economy except Switzerland was marked up, with some large moves for Finland (+1.4%), Hong Kong (+1.2%), and Austria and the Netherlands (+0.9%).
My October small economy outlook shows ongoing robust performance. Monthly PMI and export data have come in strongly. And advance estimates for Singapore’s Q3 GDP, released on Friday, reported 4.6% growth on the back of robust export-oriented growth in the manufacturing sector.
Overall, small advanced economies have been resilient to a highly challenging global environment over the past decade – and are now participating in the global upswing. This is not just due to good luck or exogenous events. It is importantly due to the quality of economic policy decision-making.
There are some shared characteristics across the small economy group through the post-crisis period. There has been a focus on fiscal discipline, controlling the increase in public debt levels, as well as strengthening national competitiveness. Small economies have focused on structural reform and adapting their economies to the emerging challenges and opportunities: from skills and labour markets, to digital and enterprise policy. There has been an understanding that, in addition to the demand side challenges, the global economy is changing structurally on the supply side: more competition, new technologies and business models, and so on. Some large economies, such as France, are beginning to change gear now. But small economies have developed an edge in their response to structural changes in the global economy.
The importance of choice is also evident in the changed IMF growth outlook for some large economies. Relative to the April forecasts, the 2017 growth forecasts for the US and the UK were marked down, by 0.1% and 0.3% respectively, in large measure due to domestic political factors: less confidence with respect to the legislative agenda in the US, and Brexit-related costs and uncertainties in the UK.
The global economy has come a long way since the global financial crisis, although economic, social and political scars remain and productivity growth remains muted – which will constrain upside potential. And despite a more positive outlook, there are real economic and financial risks outstanding: from normalisation to protectionism. But the record of small advanced economies shows that deliberate policy choices can strengthen resilience to economic shocks as well as position countries to benefit from the global recovery. That’s a useful insight for large countries also.