We often describe the global economy as a supply chain. Generally speaking, the United States and Europe are key consuming economies at the most downstream point in the global supply chain, while China occupies one of the critical midstream positions, and commodity producing economies are at upstream points in the global economy.
The good news is that the outlook for U.S. and global growth for the remainder of 2014 is positive, and the outlook for 2015 and 2016 is even better. The more challenging reality is that there is a lag between the improvements in consuming economies and emerging market growth.
In 2012 and 2013, Europe was in recession, and this rippled through the global economy, weighing on Chinese and other emerging market economic growth. This year, however, there have been improvements in Europe. At the same time, modest growth in the U.S. has occurred for the fifth consecutive year since the Great Recession. Furthermore, growth in the U.S. and Europe is likely to feed through and positively affect Chinese growth through the end of the year and into 2015.
The combined improvements in China, the U.S., and Europe should also prove conducive to emerging market eco-nomic growth, at the most upstream points of the global economic supply chain throughout the coming year.
With expansion comes inflation, and monetary policy is likely to become tighter over the next 24 months in the U.S. and abroad, because growth and the labor market are improving. For now, however, accommodative monetary policies globally remain supportive of growth, although the gradual reduction of stimulus could have modestly dampening ef-fects.
Currently, key forward-looking economic indicators remain positive, including U.S., Eurozone, U.K., and Chinese manufacturing Purchasing Manager Indices (PMIs), which indicate imminent further improvements and conditions in the manufacturing sector.
By Jason Schenker, Prestige Economics, LLC