SINGAPORE: Given the remarkable political events that have unfolded over the past 12 months, from Brexit to Donald Trump assuming the US presidency, with rising risks to the functioning of an open global system, the performance of the global economy and markets has been surprisingly resilient.
Global economic recovery continues, with stronger economic growth data around the world bearing this out. The IMF’s World Economic Outlook published in April forecasts a 3.5 per cent GDP growth for 2017 on the back of stronger performance in both developed and emerging economies.
World trade growth is showing signs of life after a very weak couple of years. Interest rate normalisation has started in the US.
Similarly, global markets are shrugging off troubling political dynamics with some localised exceptions, such as the Great Britain pound's reaction to news of Brexit or markets pricing in risks from the French presidential election. US markets remain close to record highs. European markets are doing well despite political risks and many emerging markets continue to grow.
HOW WELL SMALL, ADVANCED ECONOMIES DO IS A GOOD BAROMETER OF THE OVERALL HEALTH OF GLOBALISATION
To get a perspective on these dynamics, it is useful to consider the experience of small, advanced economies – the canaries in the mine of the global economy. They are a good barometer of the overall health of globalisation and the global economy because of their high levels of external exposure. Their exports and many other measures of international economic engagement are large relative to the size of their economies.
Small, advanced economies have performed well over several decades, within an open international economic system. So an unwinding of globalisation could have a chilling effect on them. Indeed, there is palpable anxiety in small country capitals from Singapore to Stockholm regarding the potential for protectionism and big power politics to hold sway over developments in the global economy.
Against this backdrop, many commentaries from experts suggest that investors should avoid small, open economies in favour of larger, more domestically-oriented countries.
Yet small, advanced economies' growth rates strengthened through 2016, with resilience seen across Asia to Europe. This is despite sluggish global growth and weak trade growth dragging down their performance over the past few years.
SMALL, ADVANCED ECONOMIES DOING BETTER TODAY THAN A YEAR AGO
In my quarterly tracker which monitors 13 small, advanced economies, their average growth over 2016 has been strong at 2.3 per cent. This figure excludes rapidly recovering Ireland. In comparison, large economies grew 1.9 per cent over the same period.
More recent data on these small, advanced economies, for instance exports and forward-looking measures such as industrial orders and confidence surveys, are also generally positive. Since early November before Trump took office, their equity markets have gone up by about 10 per cent and their 10-year government bond rates have risen by about 25bp.
Singapore which is often cited as a bellwether economy, is a good example. After a weak start to 2016, Singapore’s fourth quarter growth surprised many at 2.9 per cent and exports over 2016 to February 2017 grew by 22 per cent, bolstered by stronger regional demand.
Advanced estimates of Singapore’s GDP growth for the year to the first quarter of 2017 have come in at 2.5 per cent, another relatively strong result. Various measures of the health of Singapore’s industrial production also look healthy.
So although international developments made 2016 a year most small, advanced economies would rather forget, their economic performance is stronger today than a year ago.
However, this cannot be taken as evidence that there is no structural change in the global economic risk profiles of countries big and small. The performance of small, advanced economies is highly correlated with the overall strength of the global economy, and the results thus far may be a simple reflection that they are still capturing value in today's environment.
SMALL, ADVANCED ECONOMIES WILL CONTINUE TO OUT-PERFORM LARGER ECONOMIES
Aside from localised events such as Brexit, there does not seem to be major instances of change in the international order as yet, if we consider indicators such as border taxes or currency wars. However, there will likely be a bigger effect on the global economy if we move from a phony trade war into something more real, for instance if we were to move from weak G20 communique wording on protectionism to countries actually imposing border protection controls.
Just as important, the economic and market records over the past few years also show that small, advanced economies are not as disproportionately exposed to the international environment as is sometimes supposed. Indeed, despite earlier lacklustre trade growth, and a challenging macro policy environment, the growth of small economies has continued to out-pace larger economies.
The resilience of small economies to a less supportive environment is also apparent from market pricing over the past few years: It is hard to find a meaningful discount in those equity or bond markets.
Yes, small, advanced economies have high exposure to the global economy. But the way they direct international engagement, for example through a strong emphasis on outward direct investment or deep integration into regional institutions, provides a degree of resilience for them. Many also have strong macroeconomic positions including low levels of public debt, healthy current account surpluses, many areas of deep competitive advantage, well thought-out economic policies, as well as high-quality political institutions.
Indeed, small, advanced economies work hard and do so creatively at managing their external exposure.
For these reasons, I expect that many small, advanced economies will continue to out-perform larger economies – although there will likely be a wider distribution of outcomes across this former group. I am not persuaded by the claim that small economies will systematically struggle. Their growth rates will weaken if protectionist risks manifest, but relative to larger economies, they are likely to remain relatively resilient.
That said, small, advanced economies are good places to look for weak signals of change emerging, whether through looking at their trade flows, market pricing or policy debates. Changes in the global economy often manifest quickly in these places and their governments have been quick to identify the fundamental nature of the political changes over the past year.
And there is some early indication in their market pricing of weakness in the outlook for global growth. Their equities for example have not participated in the post-November rally to the same extent as larger economies, perhaps because of nervousness about the strength of the global economic outlook.
In this respect, the canaries in the mine of the global economy are beginning to sing.
Dr David Skilling is Director of Landfall Strategy Group, a Singapore-based economic advisory firm.