6 per cent global nominal GDP growth is a big deal

Peter Warburton and Tom Traill - 22 February 2018

Over the past 2 years, the pace of nominal GDP growth has picked up almost everywhere. By our reckoning, weighting the local currency data for 53 countries by economic size, global nominal incomes are 6 per cent higher than a year ago. This compares to a 4 per cent annual gain recorded in the final quarter of 2015. A 6 per cent world looks very different to a 4 per cent world: rising inflation rates of wages, profits and natural resources can coexist. Debt burdens are alleviated more quickly. Even government budget deficits look a little less threatening.

What is impressive about this resurgence of global nominal growth (figure 1) is its breadth: 40 countries have witnessed an increase in their nominal GDP annual growth rate of more than 0.5 percentage points (pp) over the prior 12 months. Over the same period, only 7 have seen a fall of more than 0.5pp. The net balance, +33, is the highest since the end of 2010.

Of course, we are far from indifferent about the composition of stronger nominal growth, much preferring an improvement in the pace of real activity. A closer look at the regional data shows that, for the global, North American and EU & EMEA aggregates, rising nominal growth is evenly split between the deflator (inflation) and real economic growth. By contrast, in Asia, price changes have dominated the nominal acceleration over recent quarters, with little movement in the real component. In Latin America the falling deflator has cancelled out the increase in real growth, leaving the pace of nominal growth little changed.

Indeed, our measure of the annual rate of inflation, derived from GDP data, has jumped from 1.2 per cent in 2015 Q4 to 2.6 per cent in the most recently available quarter, 2017 Q3. Equity investors have looked upon this modest increase in inflation with benign satisfaction. Empirical studies suggest that as the inflation rate moves from 1 per cent to 3 percent – in large developed economies – the forward-looking price-earnings ratio on equities tends to rise. However, there seems to be a threshold not too far from 3 per cent, where the mood music turns dark. The well-founded expectation of a higher interest rate forces a de-rating on equities that turns the tables.

Fixed income investors are denied even the temporary warmth of a rising inflation rate: for them, rising inflation is an immediate devaluation of the coupon. An examination of the historical relationship suggests that US bond yields have further to travel (75 basis points, perhaps?) before they have adjusted to the quickened pace of US nominal GDP growth.

For some time, we have published quarterly global nominal GDP heatmaps in our Research Digest. Now we have added equivalent content for real GDP and GDP deflators as well as some further analysis. We intend to release this new Economic Perspectives publication on a quarterly basis. We welcome any feedback on the new publication, GDP heatmaps, or suggestions for improvement, as indeed we would for any of our publications. Clients of Economic Perspectives should have received a copy of GDP heatmaps, if you are not yet a client and would like a free trial of our written research, including a copy of GDP heatmaps, then please click here.

Figure 1

Data source: CEIC and Thomson Reuters Datastream

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