The most recent consensus estimates for global Gross Domestic Product growth show a healthy “synchronized” development in most economies. Expectations for the major economies are much stronger than what economists expected at the end of 2016 for the next three years. Seems all concerns about a global slowdown and subsequent recession have disappeared. What has changed?

China

The first major driver of this newfound optimism is China. The Chinese economy has not slowed down as aggressively as predicted nor has the Yuan devalued as much as feared. The counterpart is that deleveraging and structural reforms have vanished from the China debate. Chinese total debt has surpassed 300%. In the first ten months of the year, money supply has increased by 9.2%, significantly above estimates. From January to October 2017, China has added more debt than the UK, EU, US and Japan together, and that should be a cause of concern in the next months.

Bond yields are already rising in China and the stubborn decision of the government to “print” an official growth above 6% is also creating significant imbalances in the economy that will be more difficult to solve if ignored.

Political Catalysts

The second factor behind the current wave of optimism can be found in the excessive risk attached to political catalysts in the past two years. As economists, many of us were concerned about the different events in the political calendar, from Brexit to the Trump presidency, to the French and German elections. None of these events have generated a dramatic negative effect on the major economies.

The feared “rise of protectionism” did not happen, and trade growth rose above expectations, and economic recovery accelerated throughout the year. In effect, many were wrong attaching too much risk to political events, but this has led to an opposite effect. By the end of 2017 what we can read out of consensus estimates is that political risk has been all but ignored.