Global economy changes pace

The world economy may be doing better, but not everyone is enjoying the gains

The rebound from the global financial crisis took longer than expected but finally, nearly a decade later, the global economy is finding its feet. It has been aided in no small part by the recovery in the US.

“Significant healing has taken place over the past several years,” says Tao Zhang, deputy MD of the International Monetary Fund (IMF). “The global economy is getting better.”

The IMF is expecting global growth to rise to 3.5% this year and 3.6% in 2018, up from 3.2% in 2016. But despite clear signs of positive momentum, this is still weak in historical terms.

Zhang identifies several global economic trends that help to explain this, including a synchronised slowdown in productivity growth, persistent income inequality, and the fact that globalisation is no longer generating the jobs and higher living standards that were once promised.

Since the global financial crisis, there has been a clear slowdown in productivity growth across advanced, emerging and lowincome countries (see graphs).

The fact that such an extensive decline has occurred simultaneously is in itself unusual, notes Zhang, but what makes it even more puzzling is that it comes at a time of rapid innovation and technological change.

Not only has the information technology sector made remarkable advances, but so too has the oil and gas industry, which has allowed the cost of producing energy to fall sharply.

“However, this disruptive change has taken place without an apparent increase in productivity. This is very different from previous periods of rapid innovation and technological change,” says Zhang.

Researchers have put forward various explanations for this conundrum.

Some argue that statistical data is failing to capture large parts of the new economy. Others suggest that instead of making the pie bigger, innovation could simply be redistributing the fruits of growth differently — away from labour and towards capital.

It makes sense that a decline in productivity would go hand-in-hand with weak income growth, but in many advanced countries another phenomenon has also been at work: the hollowing out of the middle class.

According to Zhang, more than half of US

households have lower incomes in real terms today than they did in 2000. Moreover, it is the middle class that has experienced the most persistent and pronounced decline.

Recent IMF research on the US economy shows that a significant part of the problem can be linked to technological change, specifically the automation and offshoring of semiskilled tasks, as many of these jobs provided middle-class incomes.

Though technology and economic integration have brought large benefits to many economies, these have not always been broadly shared, say IMF researchers Rupa Duttagupta, Stefania Fabrizio, Davide Furceri and Sweta Saxena in a recent blog.

They explain that these advances have lowered prices, greatly benefiting the poor, who spend a large share of their incomes on food, clothing and other basic goods. On the other hand, technological advance has increased the demand almost exclusively for skilled labour, while trade has sometimes displaced lower-skilled workers.

This worries policy makers. Not only has this growing concentration of income and wealth reduced aggregate consumption by about 3.5% over the past 15 years, but it has also led to electorates’ increased dissatisfaction and a sharp swing of sentiment against globalisation — as is so evident from Donald Trump’s ascension to the White House and the UK’S Brexit vote.

SA is a textbook example of how a persistent lack of economic inclusion can also damage social cohesion and undermine the sustainability of long-run growth.

So, what can be done to generate more inclusive growth? The answer, says the IMF, is to foster innovation and entrepreneurship.

Governments should improve access to education and retraining; broaden access to financial services; ensure financial stability and encourage investment; and assist with job search and job matching.

The wrong response is to adopt protectionist or isolationist measures.

“Interrupting the free flow of goods and investments is not a solution. It will only make matters worse by disrupting trade relations and supply chains,” says Zhang.

At the same time, he believes the negative side effects must be addressed. This means ensuring a level playing field that is clear of protectionist measures and distortive policies, and mitigating the effect of global transitions as much as possible.

Though much of this task falls to individual countries, the international community also has a role to play by working together to deal with cross-border issues and strengthening the multilateral system.

There is a fourth global trend that is occupying the minds of policy makers from Washington to Tokyo — the generally low level of global inflation and wage growth, especially in advanced economies.

Core inflation in Europe is still below the European Central Bank’s goal of below-butclose-to 2%. In Japan, headline and core inflation are close to zero. In the US, despite earlier progress in getting inflation to rise towards the Federal Reserve’s 2% goal, core and headline inflation have subsided to 1.4%.

Linked to this subdued inflation profile is relatively low nominal wage growth.

The IMF estimates that the US, Germany and Japan are close to full employment. But even though labour markets have strengthened, there has been little evidence of the mounting wage pressure one would expect.

Zhang believes that important structural forces are contributing to this pattern, including, as highlighted earlier, the pervasive decline in global productivity growth.

Another reason could be that there has been a decline in labour-market dynamism. He says job-to-job moves have fallen by about 40% since the late 1980s.

“This is important because the largest wage increases go to those who switch jobs,” says Zhang. “Less dynamism means less job switching, which arithmetically translates into lower average wage growth.”

There may be other secular forces at play, Zhang suggests, such as the fact that many populations in advanced economies are ageing. Another factor could be that the increasing consolidation of firms into very large companies is strengthening employers’ bargaining power, and so putting downward pressure on wages.

Whatever the reason, the trend is certainly beneficial for emerging markets.

First, the fact that global inflation remains benign and stable helps to keep emerging markets’ domestic inflation in check by reducing the amount of inflation that is imported into the country with foreign goods and services.

But, perhaps more importantly, it has delayed the pace of monetary policy normalisation in the US and Europe. This has allowed risk appetite to remain strongly in favour of emerging-market assets for the past year or two.

In SA, this has meant that the rand has remained relatively firm despite the loss of the country’s investment-grade credit rating and disappointing growth performance.

Had it not been for this benevolent global trend, the rand would likely have been weaker this year and inflation higher, and the Reserve Bank may not have been able to cut interest rates as it did in July.

Last month, the Bank held rates steady, noting that the rand poses the key risk to the inflation outlook. The Bank’s fear is that, should inflation move higher than expected in Europe and the US, it could speed up global monetary tightening, which could negatively affect capital flows into SA, hurting the rand.

But, as Zhang notes, stronger nominal wage growth will be needed in the West to put inflation back on track towards the major central banks’ targets. With little sign that the low-inflation/low-wage pattern is about to change, luck may be on SA’S side for once.

The largest wage increases go to those who switch jobs. Less dynamism [in the labour market] means less job switching, which arithmetically translates into lower average wage growth Tao Zhang