The world economy is in much better health

By many key measures, the global economy is looking good. And two things account for that: China and the United States

PUBLISHED : Saturday, 04 March, 2017, 1:30am
UPDATED : Saturday, 04 March, 2017, 1:30am

Talk about animal spirits is back. Coming as it does after one of the longest yet most unloved bull market runs in memory, should investors be worried? The craze over the IPO of the photo-messaging Snap, the biggest since Alibaba, could be a sign of froth to come. Nevertheless, the latest run-up is not without justification. The world economy really is in better shape now than it was a year ago. The Hang Seng index has hit its highest in two years. Two things account for that: China and the United States.

There is strong indication that the US economy is growing at a sustained pace. The greenback is strengthening as the US Federal Reserve moves to tighten rates, perhaps as early as this month. But even as short-term rates are set to rise, long-term borrowing rates are still accommodating by historical standards.

Contrary to US President Donald Trump’s claim that he has inherited an economic mess, he is actually seeing the benefits that his predecessor Barack Obama had helped to engineer. But Trump’s own stimulus plan of US$1 trillion to rebuild his country’s crumbling infrastructure and to cut taxes has also helped excite the market. No wonder all four major US stock indices - the Dow Industrials, S&P 500, Nasdaq and Russell 2000 – have hit an all-time high.

China may drop stimulus measures as economy gathers steam, say analysts

Meanwhile, things are looking up on the mainland. China’s producer price inflation has been on the rise in the past 12 months, which has helped the world economy recover from a deflation scare. The prices of industrial metals such as iron ore, which are critically dependent on mainland demand, hit their highest in two years.

Cargo shipping, traditionally a good indicator of global economic activities, has been on an upswing. The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying dry bulk commodities, recently breached 900 points. The index hit its lowest at 290 in February last year.

By many key measures, the world really is looking better. Except for poor Greece, the latest figures for the purchasing managers’ indices (PMI) for virtually all the major economies are positive. World manufacturing activities have clearly recovered from the global financial crisis. That is true even for the European Union, the sick man of the world economy.

There is fundamental support for the market rally. But of course, there is always that nagging fear: Retail investors, having given up for a long time, are rejoining the party, as they always do at the tail end of a bull run.

Well, caution is always warranted, but then, everyone hates to miss a great party.