Heading for Armageddon
Market convulsions are a fact of life and come and go. that is the rather reassuring view of Maurice Obstfeld, the IMF’s chief economist who is soon heading back to academia.
It is not his job to frighten the horses but careful reading of the World economic Outlook (WeO) report suggests something nastier is afoot.
this week’s bout of collywobbles started in China where the authorities eased bank reserve requirements to help firms deal with their debts. But that is just one aspect of a darkening global picture which could threaten a slump or worse.
Most roads to current instability lead back to the United States. trump’s america is doing very nicely and Britain, with its close financial and commercial ties to the US, could be a collateral winner.
as a result of the trump tax cuts, america’s growth has been boosted and output is forecast to expand at 2.9pc this year and 2.5pc in 2019.
But that is accelerating the surge in interest rates. there have been seven hikes so far in this cycle raising the key US interest rate to the 2pc-2.25pc range.
a further quarter of a point jump is expected this year and three or four increases in 2019. the result is a rush of money out of emerging markets and more mature markets into US government bonds. With the ten-year bond yielding 3.24pc, a holding in US government bonds is a nobrainer for income-seeking and nervous fund managers.
the corollary of this is the pressure it imposes on emerging markets and the rest of the financial system. the IMF puts the likelihood of outflows of $100bn, the equivalent of those in the financial crisis, at just 5pc. But outflows already have begun, with argentina and now Pakistan outside the IMF’s doors and the world’s poorest countries looking perilously damaged.
In more sophisticated economies debt levels at 250pc of total output for corporations (excluding banks) look as dangerous as they were before the financial crisis. With the cost of US money rising debt servicing and the risk of default jumps.
add to all of this trade uncertainty and the threat of a disruptive Brexit, armageddon could be just around the corner. at least in 2018 most of the risks are there for policymakers to see.
Brexit risks
aFter all the missiles fired by the IMF over dire predictions for Brexit, it chose to take the high road in the WeO.
It assumes Brexit will be frictionless, supply chains will not be greatly interrupted and that Britain’s role as europe’s financial services centre will be broadly preserved. Phew! But that is not the end of the story. Detailed analysis in the Global Financial Stability report analyses the potential pitfalls for the financial sector, ranging from the loss of the right of Uk banks and investment firms to work across the eU to more complex derivative contracts.
Concerns expressed by Bank of england governor Mark Carney are loudly echoed, notably the validity of trillions of pounds worth of derivative contracts.
there is a view inside the Bank that up to 90pc of the hard work around derivatives and the operation of central clearing platforms is done. Germany, the most likely place for migration, has all but decided it wants nothing to do with the risk.
In case it all goes horribly wrong, the IMF offers a check list of safety measures designed to prevent market meltdown.
this includes making sure banks and financial firms have people on the ground and systems that can cope (by no means certain) and that there are agreed bilateral codes of supervision.
It also wants central banks in London and across the eU to stand ready with sufficient capital to prevent ‘disorderly markets’.
Hopefully it won’t come to that.
Self-defence
anyOne who follows the twitter feeds, blogs and other outpourings of former MPC member Danny Blanchflower, Oxford economist Simon Wren-Lewis and Paul krugman in the new york times cannot help but be aware of the high opinion they have of their own skills and profession.
We can now add another name to the list. the IMF’s departing chief economist Obstfeld’s parting shot in Bali was to praise media which presents an ‘alternative vision to those who deride experts and expertise’.
are you listening Michael Gove?