Bart van Ark, chief economist at The Conference Board, visited Global Finance to discuss the state of the global economy and the outlook for 2018 and beyond.
Global Finance: What trends led to your positive forecast for this year?
Bart Van Ark: There was good momentum in the economy in 2017. We saw the stabilization of energy and commodity prices, as well as synchronized strengthening of consumers throughout the world. We saw a surprisingly healthy recovery in Europe. In the US, investment is coming back. We are also beginning to see some traction in productivity growth. In China, we saw a lot of government stimulus, and we saw good recovery in global trade. In volume terms, we haven’t seen this much activity in five or six years. All this created good momentum that led to 2017’s closing with 3% growth. A very good story compared to previous years.
GF: How long do you expect this level of growth to last?
Van Ark: The big question is whether investment and trade can continue to drive growth. Geopolitical risk is also an issue. Investment in machinery and equipment and digitization are very important. Qualitative growth is getting more important. Even wage growth is beginning to show positive signs. Yet productivity growth has been slow despite new technologies. This is unusual. New technologies have benefitted consumers more than businesses in terms of developing new models to make businesses work better.
GF: Why do you think that is? Surely there’s plenty of tech spending.
Van Ark: Companies aren’t making the investments that they need to make in order to see real productivity growth. A lot of digital spending is just spending, for example on the Cloud. It isn’t investment in hardware but in services. It isn’t currently measured as investment. This always happens with new technologies. Companies try things out. They spend significant amounts of money for different technologies. Tech companies are amazingly productive, but real investment needs to be made by other companies as well.
GF: We can’t say they are short of cash to invest.
Van Ark: Businesses say they will invest only if there is demand. But there may be demand now because of strong consumer growth. Companies are waiting to see how the [US] tax plan plays out and how other countries respond. We don’t see dramatic impacts from the tax plan in the short term. We could see that change, particularly if other countries respond. We also expect the Federal Reserve to raise rates three to four times this year.
Europe, on the other hand, is still doing quantitative easing. The European economy is growing at only about 1.5%. This can’t go on forever. We are not that impressed by the government programs they are putting in place. It will be critical to watch the ECB [European Central Bank]. They need to accelerate the tapering, but I can’t see it in 2018; it would upset markets.
GF: In terms of emerging markets, are there any rising stars?
Van Ark: There are three groups of emerging markets. China is now a middle-economy country: driven by domestic consumption, domestic services and domestic, indigenous innovation; and it’s not throwing infrastructure projects at the economy. Latin America is part of this story too. They made rapid progress in the past and are now beginning to level off.
The second group includes countries that have sustained growth. The best examples are in Southeast Asia: Malaysia, Indonesia and Vietnam. They are beginning to settle at 5% growth rates. They have open economies.
The third group includes volatile countries that have alternating years of rapid growth and disaster, such as some countries in the Middle East. Much depends on the political system. Africa is another good example.