September 26, 2018

The Economy Is Humming. Bankers Are Cheering. What Could Go Wrong?

“In terms of positive cycles, it is difficult to find very many precedents here,” said Brian Coulton, the chief economist at Fitch, the debt ratings agency. “It is the strongest growth we have seen since 2010.”

In Japan, a reform-minded government and aggressive action by the central bank have pushed growth to 1.5 percent — up from 0.3 percent three years ago.

In Europe, strong domestic demand in Germany and robust recoveries in countries like Spain, Portugal and Italy are expected to spur 2.2 percent growth in the eurozone. That would be more than double its average annual growth in the previous five years.

Aggressive infrastructure spending by China; bold economic reforms by countries including Brazil, Indonesia and India; and rising commodities prices (helping countries such as Russia) have spurred growth in emerging markets.

And in the United States, despite doubts about President Trump’s ability to pass a major tax bill, the economy and financial markets chug along.

In fact, one of the few large economies not following an upward path is Britain, whose pending exit from the European Union is taking a toll. Having grown at an average annual pace of just over 2 percent from 2012 to 2016, the British economy is expanding just 1.5 percent this year.

Still, the good news may result in some backslapping this week for policy makers and regulators more accustomed in recent years to putting out financial fires than basking in improved economic well-being.


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“The meetings will celebrate this period of synchronized economic growth and calm financial markets,” said Mohamed A. El-Erian, chief economic adviser to the fund giant Allianz.

Construction on the site of the Berlin Palace and Humboldt Forum. Strong domestic demand in Germany is helping to spur growth in the eurozone. Credit Carsten Koall/European Pressphoto Agency

There are plenty of reasons to hold off on uncorking the Champagne. Wage gains have been slow in coming. And most experts think the current sweet spot of positive growth, low inflation and accommodating central bank policies could be fleeting.

Mr. El-Erian, for example, said he was nervous about several possibilities: that global growth could taper off; that prices of stocks, bonds and other financial assets are unsustainably high; and, most important, that markets might not be prepared when central banks reverse their efforts to stimulate economies by keeping interest rates low and buying huge sums of assets.

But for the time being, investors, economists and policy officials point to a growing quantity of data that highlight the power of this recent burst of economic growth.

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Business sentiment in Japan and Europe is at 10-year highs. And last month, manufacturing activity in the United States hit its highest level in 13 years.

A big driver for growth in emerging markets, said Mr. Coulton, the economist at Fitch, has been Chinese imports, which are up more than 10 percent this year. China is the world’s largest consumer of raw materials such as oil, steel and copper, and it is increasingly buying them from emerging economies.

Global portfolio managers like Rajiv Jain of GQG Partners, who oversees $9 billion, have been quick to capitalize, snapping up shares of Russian banks and French construction companies.

“The global economy looks pretty darn good,” Mr. Jain said.

But with interest rates still historically low, investors have been pushing into even riskier assets, including the bonds of emerging-market economies, to eke out returns.

Some countries are taking advantage of the frenzy by issuing more debt. Argentina recently sold so-called century bonds, which don’t come due for 100 years. Jordan and Ukraine issued government bonds that mature in 30 years and 15 years, respectively.


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Susan Lund, an expert on global financial trends at the McKinsey Global Institute, said these types of investments from global asset managers tended to be longer term — and thus less destabilizing — than the so-called hot money from commercial banks that contributed to recent debt crises in the United States and Europe.

Are things getting too hot?

“We are in a boom today, but we should not forget that the financial system is still relatively unstable,” said Jim Reid, a credit strategist at Deutsche Bank.

Mr. Reid, who spices up his market analyses by regaling clients with pop songs on the piano, recently published a detailed study on what he expects will be the causes of the next global financial crisis.

Pick your poison: an abrupt slowdown in China, the rise of populism, debt problems in Japan or an ugly outcome to Britain’s move to leave the European Union.

His overriding worry, though, is that investors and policy makers aren’t prepared for what will happen when global central banks put a halt to their easy-money policies.

Since the 2008 crisis, Mr. Reid noted, central banks have accumulated more than $14 trillion in assets — an amount that exceeds the annual output of China by $3 trillion.

What happens when the central banks all start to sell?

“This is unprecedented,” Mr. Reid said. “And no one knows what the outcome will be.”

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