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Commentary: Behind wage and productivity clouds, world economy is booming
December 6, 2017 / 3:43 PM / 12 days ago

Commentary: Behind wage and productivity clouds, world economy is booming

LONDON The opinions expressed here are those of the author, a columnist for Reuters.

Shipping containers are stacked on a cargo ship in the dock at the ABP port in Southampton, Britain August 16, 2017. REUTERS/Peter Nicholls

(Reuters) - The dark clouds of stagnant wages, widening inequality and chronic productivity across much of the Western world are shrouding one of the most remarkable and easily forgotten facts of the year - the world economy is booming.

The value of all goods and services produced globally this year will be around $80 trillion, which is expected to grow by about 3.5 percent next year, possibly even nudging 4 percent for the first time since 2011.

Annual global growth of 4 percent or higher was in fact fairly common in the pre-crisis years. In the 11 years to 2007 that level was reached in seven, with three of those over 5 percent, according to the International Monetary Fund.

 

Growth of 4 percent next year would mean the creation of almost $3 trillion - the equivalent to the annual output of Britain, the world’s fifth-largest economy - that has to be put to work.

That’s almost $3 trillion, over and above the near $80 trillion of wealth already being produced, for consumers to spend, investors to buy financial market assets, and businesses to expand, invest and hire.

It’s a huge sum, and dwarfs the large but diminishing stimulus being provided by central banks. Policymakers are increasingly confident that world growth is now self-sustaining, hence their gradual withdrawal from the monetary stage.

“The global economy is in the midst of a mini-boom that started in mid-2016,” according to economists at Bank of America Merrill Lynch. They expect “solid” 3.8 percent global growth next year, up from 3.7 percent this year, with most major economies growing at or above potential.

Their counterparts at Barclays are even more bullish, anticipating that the “self-enforcing economic cycle” will deliver 4.0 percent global growth next year.

Good news, right?

REALITY V PERCEPTION

The trouble is for an increasing number of people, even those in countries where growth is strong and unemployment has rarely been lower, it doesn’t feel like good news.

People are in work, as record levels of employment in the United States, United Kingdom, Germany and elsewhere show, but they don’t feel rich, confident or secure. Wages are stagnant.

Unemployment in the United States is 4.1 percent, down from a crisis-high of 10 percent in 2009. Annual wage growth in that time has averaged 2.2 percent and has never topped 3 percent, compared with a pre-crisis average well over 3 percent.

Wages in the euro zone are rising at almost half that rate, and at 1.4 percent currently have rarely grown more slowly. Wages rose an average 2.3 percent a year pre-crisis and just 1.7 percent since, even as the unemployment rate has plunged from its 2013 peak.

Thanks to a mix of low wage growth and a surge in inflation since the 2016 Brexit referendum, workers in Britain are mired in the longest fall in living standards since the Second World War.

People are still feeling the effects of the deep austerity and spending cuts many Western governments pushed through after the 2008 crash in an attempt to repair their shattered public finances.

Those at the lower end of the income and wealth scale have been hit particularly hard. While they may have jobs, many work on part-time, short-term or zero-hours contracts. Poverty levels among the “working poor” are rising.

Not unrelated, by many measures wealth inequality is widening. According to a Credit Suisse annual report, wealth inequality has “trended upwards” in recent years, propelled in part by the rising share of financial assets.

The richest 1 percent of the world’s population now owns half of its wealth, up from 43 percent in 2008. There’s no sign of that trend receding. Even in developing economies, where wealth creation is strongest.

Emerging market economies are expected to expand by 5 percent next year, according to BAML, creating millions of jobs and increasing the spending power of billions of people. The world’s poorest countries are getting richer.

Some 230 million people around the world are set to move up to “middle class” status over the next five years, with two in five of those in China alone, according to Credit Suisse.

Yet, again, it doesn’t feel like it for many people.

There’s been a rapid increase in so-called payday loans in China over the past year and a proliferation in the number of companies providing them, especially over the internet. This is partly due to loose government rules in the past, which authorities are now trying to address.

Beijing is taking steps to reduce corporate and financial risks by tightening credit restrictions and clamping down on borrowing. Its ability to implement these reforms without causing too much damage to growth next year will be tested.

While BAML economists pencil in 5 percent growth across emerging markets next year, they note that large swathes of EM - Mexico, South Africa, Turkey, Saudi Arabia and India - will all grow below potential.

 

Reporting by Jamie McGeever

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