Global economy is not in good shape
It’s 10 years since the financial crisis. We need better metrics to understand what caused it
Much will be said about the 10th anniversary of the 2008 financial crisis, so I will focus on the global economy, which has not been nearly as weak as many seem to think. According to the International Monetary Fund, the rate of real (inflation-adjusted) world GDP growth averaged 3.7% in 2000-2010, and would have been close to 4% if not for the so-called Great Recession. By comparison, the average annual growth rate so far this decade has been 3.5%, which is slightly lower than the average rate in the 2000s, but above the 3.3% rate in the 1980s and 1990s. By my reckoning, China has contributed an even larger share of global growth in this decade than it did in the last, with its GDP having almost tripled from $4.6 trillion at the end of 2008 to around $13 trillion today. That additional $8 trillion accounts for more than half of the increase in global GDP over the past decade.
I have long attributed the financial crisis to imbalances within and between the United States and China, the world’s two largest economies. While the US’S current-account deficit was close to 5% of GDP in 2008 (and closer to 7% in some quarters of 2007), China was maintaining a whopping current-account surplus of 9% or higher.
Following the crisis, I predicted that the US and China would have to swap places to some extent over the course of the next decade. China needed to save less and spend more; and the US needed to save more and spend less. Judging by their current accounts today, both countries appear to have made significant progress. In 2018, China’s surplus will have fallen to around 0.5-1% of GDP, which is remarkable considering that its GDP has more than doubled since 2008. Equally remarkable, the US will register a deficit of 2-2.5% of GDP, which is within the 2-3% range that many economists consider sustainable.
Other global indicators, however, are not as encouraging. Back in 2008, the eurozone ran a current-account deficit of 1.5% of GDP, with Germany recording a surplus of around 5.5%. But Germany’s large surplus owed much to large deficits in other eurozone countries, and that imbalance gave rise to the euro crisis after 2009. Worryingly, Germany’s surplus has since ballooned to around 8% of GDP. As a result, the eurozone now has a surplus close to 3.5%, despite, and probably because of, years of weak domestic demand in the Mediterranean member states. This is surely a sign of further instability ahead. In fact, the slowbrewing crisis in Italy may be a harbinger of what awaits the bloc.
A central feature of the economy prior to the financial crisis was the US housing bubble, which itself resulted from the financial sector’s invention of increasingly intricate (and dubious) methods of recycling global savings. A decade on, it bears mentioning that many “global cities” like London, New York, Sydney, and Hong Kong now have home prices that only a very small minority of their permanent residents can afford, owing to the growing demand from wealthy investors abroad.
But as of this year, there are growing signs that housing prices in these and other cities may be undergoing a reversal. This may simply reflect actions taken by municipal governments to provide more affordable housing to their residents; but it also could indicate that marginally affluent new buyers are becoming scarcer. To be sure, a gradual decline in house prices in these cities would be a welcome development in terms of economic and social equality. But one would search in vain for a time when declining home prices did not produce damaging side effects. Having now assumed the chairmanship at Chatham House, I am eager to encourage more research into how factors such as housing costs relate to larger issues of income and wealth inequality. To my mind, the world needs much better metrics for tracing these interconnections. For example, it is clear that wealth inequality has increased much more than income inequality over the past decade, with the rapid rise in urban housing prices playing a central role. In many developed countries, including the United Kingdom, economic inequality is a serious problem. Yet in terms of income, the latest data show that inequality has actually fallen back to the (still-too-high) levels of the 1980s.
If common perceptions about inequality tend to inflate what is actually happening, that is because many companies’ top executives are earning increasingly massive sums relative to the workers under them. Such compensation packages can be rationalised in the context of share-price performance, but that ment’s various missions, PM Modi has chosen to empower the Dalit community, rather than seek their votes through fake victimhood. Rahul Gandhi is not alone in spreading falsehoods. He has been joined by individuals who pretend to be activists, but are at their core political actors. Their aim is to undermine the state, and derail any effort made towards development. Arundhati Roy is one such individual. Her most recent attack against the government comes in the wake of the arrests of individuals the Pune police suspect of aiding the Maoist and Naxalite movement.
Naxalism is India’s biggest internal security threat. Its objective is an armed rebellion against the Indian state and the overthrowing of its democratic polity. State capture through an armed struggle is qualitatively different from the expression of dissent. To proudly claim “I am an Urban Naxal”, therefore, does great disservice to our security forces, many of who have died fighting Naxalism.
Roy’s hypocrisy, however, doesn’t stem from her support for Naxalites; she has been consistent in this regard. At a press conference on the arrests made in Pune, she propa- hardly makes them justifiable.
This is another issue that I hope we will be studying at Chatham House. The strange equity-market rally that has been proceeding almost uninterrupted since 2009 has been fuelled in large part by major corporations’ stock buybacks.
In some important cases, companies have even issued debt to finance the repurchase of their shares. Does the growing prevalence of buybacks explain why fixed investment and productivity have remained so weak across the West? And might those macroeconomic factors explain some of the political upheavals in Western democracies such as the UK and the US in recent years?
On both counts, I suspect that the answer is yes. Unless we can recover a world in which business profits actually serve a purpose, the likelihood of more economic, political, and social shocks will remain intolerably high. gates the lies spread by the Rahul Gandhi on the Rafale deal. When did Roy and Rahul Gandhi become allies? Roy needs to be reminded that it was Rahul Gandhi’s party that had first come down hard against Naxals. P Chidambaram is on record suggesting the use of air power against Naxalites, in the aftermath of a brutal attack in 2010, that claimed the lives of 76 security personnel.
The purpose of this article is not to pick on specific individuals. It is to expose an ecosystem that would like people to believe their lies, to mask their hypocrisy. The very fact that this ecosystem can so clearly misuse their freedom of speech by spreading fabricated stories shows that the present establishment is not in the least bit authoritarian. I would, in fact, argue that this dispensation has faced more scrutiny than any previous government. And, more importantly, no prime minister has been critiqued as often, and as bitterly, as Modi. The government has taken such accusations on its chin, and continued to deliver on its promise of good governance. every visit to a doctor. Even before going on life support system, he was asking the ward boy for his share of coconut water. He had immense faith in himself or some unknown and never spoke of death even when he breathed his last breath. He left a valuable lesson to me that life is precious and beautiful, and definitely shouldn’t be wasted.