THE WORLD HAS BEEN HERE BEFORE
While things feel far more volatile and uncertain, we may simply be reverting to the conditions of the not-so-distant past. Still, brace yourself
There is a saying: “History never repeats itself, but it often does rhyme.” In 2018, the International Monetary Fund (IMF) warned that heads of state should “listen closely to the echoes of history to avoid replaying the discordant notes of the past”.
The increased incidence of overlapping calamities in recent years feels like a global reset, characterised by higher levels of volatility, a wider range in macroeconomic forecasts and more erratic cycles.
However, we may just be returning to a regime akin to that before the 1980s, where economic cycles were shorter and sharper, the range of macroeconomic outcomes was wider, and the world was more uncertain and volatile.
A number of pillars were instrumental in reducing volatility, steadying growth and lowering inflation in the period between the 1980s and the global financial crisis of 2008, also dubbed the
“Great Moderation”. However, these macro underpinnings have undergone fundamental changes recently, thanks to a series of interwoven crises.
Let’s have a look at how these pillars have changed, leading to a reshaping of the macroeconomic landscape:
Pillar 1: Centrism
History teaches us that an increasingly stark divergence of political attitudes away from the centre, towards ideological extremes, is often followed by inflamed social tensions, political violence, weakened democratic processes, eroded trust in policymakers and less effective governance of elected officials.
Pillar 2: Worldwide peace
Russian President Vladimir Putin’s assault on Ukraine accelerated the reversal of the post-Cold War era, in which defence spending was slashed and reallocated to other socioeconomic priorities, leading to greater economic growth. Despite previous complacency on defence, European countries are now pledging to bolster military spending. So governments may have to skimp on other spending needs to hit budget targets.
Pillar 3: Globalisation
A stalling in trade openness suggests that globalisation, which lifted many countries out of poverty by rapidly increasing trade, economic and financial linkages, may be slowing. The IMF calls this “slowbalisation”. It’s characterised by a shift away from global interconnectedness towards greater protectionism and economic nationalism. The World Bank warns that this could reduce aggregate global living standards and distort international trading systems.
Pillar 4: Cheap money
The era of low interest rates and cheap money died last year, with the arrival of potent inflation. The need to quell inflationary pressures caused central banks to pivot their view on monetary policy to a more restrictive stance, and balance sheets have also been reined in, leaving the world with less abundant liquidity and costlier debt as financial conditions have tightened.
Pillar 5: China
China’s integration into the world economy has been one of the most dramatic economic developments in history, advancing growth for regional economies and commodity exporters. However, the export-dependent growth model on which China formed its economic success in recent decades has been fraying. Self-reliance and an inward tilt of economic policymaking suggests China’s rapid expansion will probably slow. This refocused growth model further implies that other countries will receive less of a boost to their economies per unit of China’s growth.
Pillar 6: The ChineseAmerican axis
Previously a dominating force, Chinese-American bipolarity is now sharing the global political stage with strong regional political powers such as Russia and Turkey. They don’t wield global economic power, but they do exert great geopolitical influence. The reaction of various powers to Russia’s war against Ukraine, rising alternatives to the Bretton Woods institutions (created to sustain the benefits of global integration) and a retreat in multilateralism all point to a shift to a multipolar world.
Reflecting these new realities of power could place many jurisdictions at risk of destabilisation. What’s more, ambiguous alliances could complicate global cooperation when it comes to protecting our environment from the threat of climate change, improving health outcomes and promoting international peace.
In this new-old regime of higher volatility and lower macroeconomic stability, the globe remains vulnerable to shocks. Global financing conditions have tightened sharply. This has pushed up debt servicing costs, which have further reduced fiscal space and raised sovereign credit risks.
In response, policymakers should shore up economic resilience within financial and institutional capacity constraints. In South Africa’s case, we may need to create more incentives for private investment, protect the vulnerable in a fiscally responsible manner, embrace the digital economy, improve the governance and performance of public firms, encourage a business-friendly climate, strengthen employment and support productivity gains.
Given the parallels with the period before the Great Moderation, we should acknowledge the rhymes of our global history and ensure that heads of state do not put short-term advantage ahead of long-term shared economic prosperity.