Washington / Paris: When it comes to world economic growth, the glass is suddenly looking a lot more than half full. Not only is the global economy confounding concerns about a slump, it’s even performing better than what some of the most upbeat analysts were predicting just a few weeks ago. Worldwide growth looks set to outstrip forecasts for a sixth straight year in 2007.
“Perhaps it’s time to stop looking for reasons why the global economy will crash and instead think about sources for optimism,” says Dario Perkins, senior European economist at ABN Amro Holding NV in London and a former UK treasury official. Behind the surprising strength: something old and something new. A resurgence in old-economy manufacturing and a wave of new-style financing are combining to push down unemployment and boost corporate profits.
Manufacturers worldwide are revving up production after bringing down inventories. Some, including Toyota Motor Corp., 3M Co. and Caterpillar Inc., are even adding capacity.
Meanwhile, a new crop of financiers—including hedge funds and private equity firms such as Chicago-based Madison Dearborn Partners LLC—is providing fuel for still more growth by leveraging hundreds of billions of dollars in assets.
The combination sets the stage for a faster rebound in the US, while helping Germany and China defy forecasts of a slowdown.
“The current economic situation is in many ways better than what we have experienced in years,” says JeanPhilippe Cotis, chief economist at the Paris-based Organization for Economic Cooperation and Development, which just raised its 2007 growth forecast for its 30-member nations to 2.7% from 2.5%.
What’s driving the higher rates is stronger growth—and the increased demand for credit that it spawns—not signals of rising prices. Inflation expectations, measured by inflation-indexed bonds in the US and Europe, have barely budged. “We’re comfortable with the rise in bond yields,” says David Malpass, chief economist at Bear Stearns & Co. in New York. “It’s related to growth and not to a change in the inflation outlook.”
Still, the risk remains that central banks will view faster growth as a harbinger of accelerating inflation and feel compelled to raise interest rates, smothering the expansion. The European Central Bank is predicted to raise its benchmark rate to 4%, the highest since September 2001, this week.
Nariman Behravesh, chief economist for Global Insight in Lexington, Massachusetts, sees as much as a 25% chance that growth this year will be strong enough to force central banks to slam on the brakes.
So far, though, there’s little to suggest overreaction. JPMorgan Chase & Co.’s global interest rate indicator, based on the policies of 31 central banks, stands at 4.67%, below the 7.02% peak in November 2000, before worldwide growth slowed by almost half.
Also fuelling the expansion are new sources of finance outside the banking sector. Hedge-fund assets have tripled in the past decade to $1.57 trillion. Private equity companies may be headed for a record year of acquisitions, bidding $447 billion for companies so far this year against $228 billion in the year-ago period. Such financing is “pumping up the global economy in ways we haven’t seen before,” says Allen Sinai, president of New York-based consultants Decision Economics. Sinai expects worldwide growth above 5% this year, faster than IMF’s 4.9% April projection. If Sinai’s right, 2007 would be the sixth straight year that IMF’s spring forecast proved too conservative.
In the US, economists are increasing their second-quarter forecasts as manufacturers step up production, rebuild inventories and spend to expand. Industrial production rose twice as fast as forecast in April as auto makers and high-tech firms increased output. Economic reports on 1 June showed US manufacturing and employment both expanded more than forecast in May.
“The worst is behind us,” says Chris Varvares, president of St. Louis-based Macroeconomic Advisers, who sees growth accelerating to 3% in the second quarter from 0.6% in the first, the slowest in more than four years.
“That’s why the stock market is looking good.”
The Standard & Poor’s 500 index has risen 3.5% in the last month. Profits of companies in the index increased by more than 10% in the first quarter, four times faster than analysts forecast in April, thanks in part to stronger sales overseas.
At 3M, the St. Paul, Minnesota-based maker of products from Post-it notes to road signs, increased business in China and India contributed to a 52% surge in first-quarter profit. “Asian economies from Japan to China all look to be powering ahead,” says Derek Halpenny, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd in London. Chinese industrial production has grown at a year-over-year rate of 18% in the first four months of 2007, up from a two-year low of 14.7% in October.
Nipa Piboontanasawat in Hong Kong, Elizabeth Stanton in New York, Rachel Layne in Boston, Will Daley in Chicago and Harris Rubinroit in New York contributed to this story.