Yesterday I had the opportunity to sit in a classroom with fifty other students, and listen to Jim O’Niel (Commercial Secretary to the Treasury, and former Chief Economist at Goldman Sachs) talk about what direction he believes the world’s economy is taking.
When I started the course ‘Foreign Direct Investment and Emerging Markets’ as part of my MSc in Economics and Management at LSE, I was pleased to hear that some of our classes would be taught by external professionals, and thrilled to know that one of them was going to be Jim O’Niel, the inventor of the term BRICs (among other things, of course). Yet, I hadn’t quite realised how insightful the class was going to be. So insightful in fact that I thought I should share some of his wisdom with you.
Signs that it was going to be no ordinary talk came early, as he begun to talk about his current position at Treasury, while casually referring to former UK Chancellor of the Exchequer George Osborne as ‘Georgey’ (it took me a while to figure out who he was talking about). The crucial point he made was that as the second month of 2017 comes to an end, it is becoming more and more evident that we are at the best point of this decade’s business cycle, “according to the indicators that he has learned to trust”.
Here I have summarised what they are, and why, according to Jim, combining them provides a rather accurate accurate account of the global economy:
(1) Global Purchasing Managers’ Index (PMI): A global indicator representing the health of the manufacturing and services sectors by tracking variables such as output, new orders, employment and prices across key sectors. It is published once a month by the sixty largest economies and has reached a six year high this January.
(2) Purchasing Managers’ Index for the US: In particular, two sub-components of the US PMI – the inventories index and the number of new orders. Jim looks at the gap between new orders and inventories (inventory-sales gap), as when the gap begins to rise production will likely increase to match growing demand.
(3) German IFO: The leading short-term indicator for economic activity in Germany compiled from survey data on business climate, current business situation and business outlook. Although the information is about Germany, according to Jim it gives quite a clear sense of the European business climate in general. Interestingly enough, as of the end of 2016, China has become Germany’s number one trade partner (Imports + Exports), overcoming all other European countries. In an EU context this information is pretty remarkable, especially considering international trade theory premises for the drivers of trade: distance and growth.
(4) South Korean Exports: According to Jim, South Korea is the most fascinating country of his lifetime, being the only economy which has successfully moved from emerging market to developed economy. However, the reason why this index is so interesting has rather to do with the fact that South Korea publishes its export data before any other country in the world. This, combined with the fact that South Korea trades with most of the world, makes the data an incredibly up to date indicator of global trade. Here as well, we begin to see some recovery.
(5) Weekly Job Claims in the US: By looking at how many people claim job insurance in the US, we can gather important information about employment and the health of the world’s largest economy. Last week the number hit a 40 year low – the dramatic fall in unemployment can only indicate that consumer demand will grow to be strong.
(6) The ratio of real retail sales and industrial production in China: This is essentially the ratio of what China is consuming domestically over what it is producing. The number has been going up, as the Chinese middle class grows and consumer spending increases. The importance of this in the context of the world economy is that Chinese imports will begin to take off, and demand for foreign products will rise, particularly from advanced economies. Before the 1990s, China was producing a lot and consuming very little, but this is no longer the case. At this point, like every time the word ‘Globalisation’ is mentioned in a LSE lecture hall, Jim of course made a Trump joke. I can’t remember the joke exactly, but the point was that the US and Europe might have wanted to stop trading with China twenty years ago, but that has changed drastically now they can actually start gaining from exporting high end goods to their growing middle and upper classes.
All in all, Jim O’Niel explained quite originally how he expects most “respectful economic forecasts” to be revised upwards this quarter. The Bank of England has already done so, and it would come as no surprise if the IMF were to come to a similar conclusion at its April meeting. In other words, in spite of disruptive forces like Brexit, The Donald, Putin, terrorism, the upcoming French elections and the ‘rise of populism’, things may just be starting to look up in 2017.
ABOUT THE AUTHOR
Luisa-Alix Orsini Baroni is a student on the MSc Economics and Management in the Department of Management at LSE. She did her undergraduate studies in Economics at the School Of Oriental and African Studies, University of London, and is passionate about writing.