The outlook for the global economy continues to improve at a gradual pace. The forecast now calls for global GDP to expand somewhere close to 2.5 percent. This follows a gain of just over 2 percent in 2016.
As always, there is a high level of uncertainty in this forecast, but the identifiable risks at this time appear to be balanced.
This increase in overall economic activity is starting to show up in both the international financial market data and also the global manufacturing data. I will leave it to you to look up the recent trends in the financial markets if you are so inclined, but I will share some of my analysis of the data from the J.P. Morgan Global Manufacturing Purchasing Managers Index (PMI). According to the latest release, the Index hit a 69-month high of 52.9 in February. This marked the 12th consecutive month that the index was above the neutral threshold of 50.
Faster rates of increase were reported for total output, new orders, exports, employment and expectations for future output. The pace of job creation was the strongest in five and a half years, and the gain in exports was the largest in almost six years. Slower rates of increase were reported for prices of both inputs and outputs. The increase in new orders was sufficient to produce a rise in backlogs for the ninth straight month. All said, this was an excellent report that indicates that the already positive trends for global manufacturers are getting stronger so far in 2017.
For those of you not familiar with this index, it is produced monthly by J.P. Morgan/Chase and IHS Markit in association with both the U.S.-based Institute of Supply Management and the International Federation of Purchasing and Supply Management out of Switzerland. It is the same idea as the PMI from this country with which you are already familiar, but this one is derived from a survey of 12,000 purchasing executives in more than 40 countries.
I point this out because when it comes to indices that are based on surveys, I tend to put more predictive value in trends from a dataset that is broad and diverse. It is not possible to discern just how fast the global economy is actually growing from this particular index, but if a solid majority of respondents say their business is improving, and this trend has been sustained for a long period of time, then I am going to go with the trend.
And it should not come as any surprise that one of the main reasons global manufacturing activity is in an upward trend is the steady and long-term improvement in the U.S economy. Furthermore, the outlook for a continued expansion in the U.S. economy combined with the continued strength of the U.S. dollar is expected to be a major driver of economic growth in Europe, Japan and China. As the burgeoning gap in our trade data will attest, the U.S. consumes a large portion of the world's products.
Now in case you have not been paying attention, the ramifications of increased levels of global trade are generating a lot of political rhetoric these days. Not just in the U.S., but in Europe and Asia as well. And therein lies the biggest risk to the forecast — that all of this rhetoric will heat up to the point where political actions are taken that restrict the global flow of trade.
I do not want to get too political here, but I strongly believe that you cannot "put America first" by restricting trade in the long run. You must make absolutely sure that the trade is fair, and once you are assured of its fairness, you must encourage as much fair trade as possible. Americans are natural competitors, and good competitors do better when there are more chances to compete.
I don't need to remind anybody that the American plastics industry was battered by foreign competition a few years ago. But as is typically the case around here, we just got better. We make the best stuff, and as long as we are not in a rigged game, we will do very well in a competitive marketplace. Besides, trade is not a zero-sum game where there is a loser for every winner. When trade is done right, both sides come out ahead.
Another major risk to the forecast is that trade flows will increase too rapidly, and the result will be a surge in global inflation. Such a surge in inflation could prompt the central banks of the world to raise interest rates at a faster rate than is expected at the present time and thereby curtail the rate of economic expansion. Right now, the world needs a little more inflation, but not too much, so the Fed and the other major central banks are trying to guide their respective economies toward a "Goldilocks" scenario in which the rates of inflation and economic growth are "just right."
If you are a supplier of machinery and equipment to the plastics industry, then you are likely already aware of the prevailing global trends in trade, foreign exchange rates and geopolitics. So this outlook will probably not result in any major changes to your competitive strategy. As for plastics processors, there is a wide divergence in how they are affected by the changes in trends in global trade and foreign competition. But regardless of whether you face foreign competition every day or not, your market will most likely benefit from an overall increase in economic activity.
That is true on a local level, and it is true on a global level as well. When there is an overall increase in the volume and rate of money changing hands, the probability that we are presented with a chance to get more of it also increases.
And it should not come as any surprise that one of the main reasons global manufacturing activity is in an upward trend is the steady and long-term improvement in the U.S economy. Furthermore, the outlook for a continued expansion in the U.S. economy combined with the continued strength of the U.S. dollar is expected to be a major driver of economic growth in Europe, Japan and China. As the burgeoning gap in our trade data will attest, the U.S. consumes a large portion of the world's products.
