Poised be­tween fear and hope

Enterprise - - Contents -

The world econ­omy ap­pears to be at a fork in the road. On one path, 2016 ap­pears likely to wit­ness a de­te­ri­o­ra­tion from the medi­ocre to the mis­er­able; on the other is a happy con­tin­u­a­tion of the nor­mal­i­sa­tion from the 2008-09 financial cri­sis, with a more bal­anced and sus­tain­able global econ­omy. No one is sure which path the world will fol­low; nor whether pol­icy is suf­fi­ciently strong to in­flu­ence the out­come.

There is lit­tle doubt that the eyes of the world are sharply fo­cused on the risks and chal­lenges. Fears rose pre­cip­i­tously in the sum­mer af­ter China de­val­ued its cur­rency, high­light­ing con­cerns that the coun­try’s eco­nomic prospects are de­te­ri­o­rat­ing rapidly and re­ces­sions deep­ened in other former stars of the global econ­omy such as Brazil and Rus­sia. Global eq­uity mar­kets have just en­dured their worst quar­ter since 2011.

Along­side weak financial mar­kets, cap­i­tal has re­treated to­wards havens in the de­vel­oped world, com­mod­ity prices have plum­meted and world trade growth re­mains stalled. China, not long ago the re­li­able en­gine of the world econ­omy, is now seen as its great­est vul­ner­a­bil­ity, rep­re­sent­ing, as it does, 16 per cent of world out­put and al­most 30 per cent of ex­pected growth. “The key risk to global growth is a larger-than-ex­pected slow­down in China,” ac­cord­ing to the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and


With some in­vest­ment banks such as Citi fore­cast­ing a global re­ces­sion in 2016, of­fi­cials are keen not to be caught nap­ping as they were be­fore the 2008 down­turn.

Chris­tine La­garde, head of the IMF, says poli­cies to ad­dress prob­lems among the world’s lead­ing economies are ur­gently needed at a “dif­fi­cult and com­plex” time, since “down­side risks to the out­look have in­creased, par­tic­u­larly for emerg­ing mar­ket economies”.

Andy Hal­dane, chief econ­o­mist of the Bank of England, warns that the trou­bles in China are signs that “we may now be en­ter­ing the early stages of part three of the [global cri­sis] tril­ogy, the ‘emerg­ing mar­ket’ cri­sis of 2015 on­wards”.

A third cri­sis sce­nario — fol­low­ing that in the US and UK economies in 2008-09 and the eu­ro­zone in 2011-12 — would stem from dan­gers posed by the rise in Chi­nese debt since 2008. Pri­vate, non-financial debt reached 160 per cent of gross do­mes­tic prod­uct in the US in 2007 and al­most 200 per cent in the UK be­fore house­holds and com­pa­nies tight­ened their belts. China has al­ready sur­passed th­ese lev­els, ac­cord­ing to data from the Bank for In­ter­na­tional Set­tle­ments.

With growth slow­ing, per­haps far more rapidly than of­fi­cial Chi­nese statis­tics show, the abil­ity to ser­vice and sus­tain such debt is in ques­tion. De­faults and huge losses could fol­low, spark­ing a vi­cious cir­cle of fragility and bank­ruptcy in the financial sec­tor, a squeeze on credit and yet weaker eco­nomic prospects. The rest of the world would not be able to ig­nore such a cri­sis, given China’s size, trade links and financial con­nec­tions with other coun­tries.

Bei­jing’s mixed mes­sages and failed at­tempts to pre­vent its stock mar­ket bub­ble burst­ing over the sum­mer have not in­spired con­fi­dence that it is uniquely placed to avoid dis­as­ter.

But for all th­ese gen­uine and plau­si­ble fears, the world is not yet be­ing buf­feted by an­other eco­nomic storm. De­spite con­tested Chi­nese eco­nomic statis­tics show­ing growth still at an an­nual rate of 7 per cent, there is un­de­ni­able re­bal­anc­ing un­der way in China from con­struc­tion and heavy ma­chin­ery in­vest­ment to­wards con­sump­tion and ser­vices. In many of the other large world economies, the pic­ture and the eco­nomic data are far from dis­as­trous.

Still the world’s most im­por­tant econ­omy, the US is con­tem­plat­ing rais­ing in­ter­est rates for the first time in a decade. This re­flects the ma­tu­rity of its eco­nomic re­cov­ery and its suc­cess in gen­er­at­ing em­ploy­ment growth. The un­em­ploy­ment rate has fallen to his­tor­i­cally nor­mal lev­els. Janet Yellen, Fed­eral Re­serve chair, ex­plained the de­ci­sion not to raise rates in Septem­ber as re­flect­ing in­creased un­cer­tainty in the global econ­omy. Ms Yellen has made it clear that she sees strong prospects when she looks at the US, as do her col­leagues on the Fed­eral Open Mar­ket Com­mit­tee, which sets in­ter­est rates.

“Most FOMC par­tic­i­pants, in­clud­ing my­self, cur­rently an­tic­i­pate that achiev­ing th­ese con­di­tions [of max­i­mum em­ploy­ment and sta­ble in­fla­tion] will likely en­tail an ini­tial in­crease in the fed­eral funds rate later this year, fol­lowed by a grad­ual pace of tight­en­ing,” Ms Yellen said in Septem­ber. In Europe, many eco­nomic in­di­ca­tors are look­ing more pos­i­tive than at any time since the eu­ro­zone cri­sis started in 2011. Greece showed this year that it no longer has the power to de­rail the rest of the sin­gle cur­rency area and con­sumers are en­joy­ing a rare in­crease in their net in­comes fol­low­ing the de­cline in com­mod­ity prices across the world.

Mone­tary and fis­cal pol­icy is stand­ing by, ready to re­act to slower global growth prospects, with fur­ther mone­tary stim­u­lus likely in com­ing months.

As a big oil and met­als im­porter, China gains from the fall in com­mod­ity prices, as does In­dia — the world’s fastest grow­ing big econ­omy. Many of the bet­ter man­aged com­mod­ity-ex­port­ing economies have ben­e­fited from cur­rency de­pre­ci­a­tion, off­set­ting the do­mes­tic hit from lower prices with­out rais­ing in­fla­tion sig­nif­i­cantly.

Ju­lian Jes­sop of an­a­lysts Cap­i­tal Eco­nom­ics thinks that the shocked mar­ket re­ac­tion to the events of the sum­mer has been far too sud­den and ex­ces­sive: “The up­shot is that rather than the tur­moil be­ing a new threat, we think that the con­sen­sus is play­ing catch-up with trends in place for sev­eral years.”

If true, rather than the world en­ter­ing a third leg of a global financial cri­sis, it is more a con­tin­u­a­tion of global growth at roughly the av­er­age level of the past 30 years, with some coun­tries do­ing bet­ter than oth­ers: nor­mal­ity rather than ex­tra­or­di­nary times. As for China, if this prag­matic view holds true, the author­i­ties will make er­rors but also progress in re­bal­anc­ing the econ­omy from in­vest­ment to­wards con­sump­tion.

The world in 2016 does not need to take an ex­treme path, says Erik Nielsen, chief econ­o­mist at UniCredit — though there are many op­tions avail­able.

“We econ­o­mists love to fore­cast smooth paths, while drama queens and head­line grab­bers love to pre­dict im­mi­nent col­lapse,” he says.

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