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May 27, 2014 at 08:00 PM
Developed nations are showing renewed signs of stability in output growth and employment, according to recent data from the International Monetary Fund. Meanwhile, the emerging markets of the world have hit an important milestone: Their combined gross domestic product now represents more than 50% of global production, a recent IMF report states.
These trends are good news for companies selling products and services worldwide—and for their investors. As economic stability continues over the next few years, both corporations and consumers are expected to buy more oil, for instance, as well as more pharmaceuticals.
The U.S. Energy Information Administration has estimated that global consumption of oil grew by 1.2 million barrels per day in 2013 and averaged 90.4 million barrels per day for the year.
The EIA expects global consumption to grow by 1.2 million barrels per day again in 2014 and then jump by 1.4 million barrels per day in 2015. It also projects that global-oil-consumption-weighted real GDP, which increased by an estimated 2.3% in 2013, should expand 2.9% this year and 3.4% in 2015.
The global pharmaceutical market, as tracked by the International Federation of Pharmaceutical Manufacturers & Associations, could reach nearly $1.2 trillion by 2016—up from about $960 billion in 2011. Plus, the leading emerging countries should account for 28% of global spending on pharmaceuticals in 2016 vs. 12% in 2005.
‘Great Moderation 2.0′
What factors are producing today’s rosy economic picture? The answer begins with the general stability of many major economies from 1984-2008, referred to as the “Great Moderation” by some experts; it featured low variability in both real GDP growth and inflation. This period, of course, did include some bumps but was dominated by consistent, moderate expansion.
Next came the Great Recession of 2008-2009. But some five years later, the world’s developed economies seem to be experiencing “Great Moderation 2.0,” according to economists John Normand at JP Morgan and Dominic Wilson of Goldman Sachs.
Today, growth volatility in the main industrial countries is the lowest it has been since 2007, Bloomberg calculated in early May using IMF data. Plus, volatility is about half of what it was for the 20 years starting in 1987.
Furthermore, a risk measure that relies on options and anticipates movement in equities, currencies, commodities and bonds is at its weakest level of almost seven years, the news group says.
The Group of Seven nations’ variability in employment growth should decline to 0.4% in 2014 vs. nearly 3% in 2010. This figure averaged 0.8% in the 20-year period ending 2007, according to the Bloomberg analysis of IMF statistics. It hit a high of 1.7% in 2009 but dropped to 0.1% in 2014.
The Bank of America Market Risk Index fell to negative 1.14 on May 2, which is its lowest level since mid-2007, the news group says. At the same time, JPMorgan’s Global VX Volatility Index has revealed the lowest fluctuations in the currency market for the past seven years.
This certainty is keeping consumer and investor confidence at high levels in the major economies. But those in the emerging markets have plenty of reasons for optimism, as well, as they become the dominant GDP muscle in the global economy.
Wither Volatility?
A feature of 2014 has been the degree to which volatility has fallen across the financial markets — whether equities, bonds or foreign exchange. For some, this is an opportunity “to take a breather, after several years of challenging conditions,” explain Ian Harnett, David Bowers and Zahra Ward-Murphy of Absolute Strategy Research in a May report.
“Today’s low market volatility reflects the new macro-economic reality,” the authors noted.” In other words, the low volatility in no accident.
“Pessimism about the ability of markets to sustain low volatility often ignores the fact that the economics have also calmed down! Persistent low interest rates and a policy focus on delivering consistently rising payrolls have helped see the dispersion of economic forecasts fall across most major economies, helping validate low volatility,” the experts shared.
Greater policy certainty, they add, creates more economic certainty and pushes market trends to persist longer than anticipated. And, at least for now, issues that have concerned investors and policy-makers alike, such as excess leverage and extreme valuations between sectors, stocks and assets, have yet to emerge.
Global Dynamics
Some experts are focused on the economies of the United States and China, which are neck in neck this year when it comes to having the world’s largest economy. But there’s another race that’s already been won: Emerging markets have overtaken developed economies in terms of having the largest share of global GDP.
“This is clear from new IMF data released in April. Clearly, both investor perceptions about and allocations to EM continue to lag far behind EM’s rapid fundamental advances,” explained Jan Dehn, head of research for Ashmore Investment Management.
“This is true in both equities and fixed income, but especially in fixed income, where allocations by many investors lag weighting implied by simple GDP weighting by as much as 10 times,” the London-based researcher noted in a report in early May. “This suggests that EM’s long-term technicals remain extremely strong.”
According to the IMF’s April 2014 “World Economic Outlook” analysis, the emerging markets’ share of global GDP hit 50.4% in 2013, up from 31% in 1980, after adjusting for purchasing power parity (or PPP).
Emerging-Markets Boom
These economies increased their share of global GDP by an average of 0.6% per year over the past 33 years, Dehn notes. And there’s no end in sight.
“Interestingly, the IMF expects EM share of global GDP to increase at an ever faster pace going forward. According to its forecasts, EM’s share of global GDP will grow by an average of 0.7% per year from now until 2019 to reach 54.5%,” the ex-World Bank consultant explained.
