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The Global Growth Funk
The Global Growth Funk
NEW YORK – The International Monetary Fund and others have recently revised downward their forecasts for global growth – yet again. Little wonder: The world economy has few bright spots – and many that are dimming rapidly.
Among advanced economies, the United States has just experienced two quarters of growth averaging 1%. Further monetary easing has boosted a cyclical recovery in the eurozone, though potential growth in most countries remains well below 1%. In Japan, “Abenomics” is running out of steam, with the economy slowing since mid-2015 and now close to recession. In the United Kingdom, uncertainty surrounding the June referendum on continued European Union membership is leading firms to keep hiring and capital spending on hold. And other advanced economies – such as Canada, Australia, Norway – face headwinds from low commodity prices.
Things are not much better in most emerging economies. Among the five BRICS countries, two (Brazil and Russia) are in recession, one (South Africa) is barely growing, another (China) is experiencing a sharp structural slowdown, and India is doing well only because – in the words of its central bank governor, Raghuram Rajan – in the kingdom of the blind, the one-eyed man is king. Many other emerging markets have slowed since 2013 as well, owing to weak external conditions, economic fragility (stemming from loose monetary, fiscal, and credit policies in the good years), and, often, a move away from market-oriented reforms and toward variants of state capitalism.
Worse, potential growth has also fallen in both advanced and emerging economies. For starters, high levels of private and public debt are constraining spending – especially growth-enhancing capital spending, which fell (as a share of GDP) after the global financial crisis and has not recovered to pre-crisis levels.
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Unconventional Monetary Policy on Stilts
Unconventional Monetary Policy on Stilts
NEW YORK – With most advanced economies experiencing anemic recoveries from the 2008 financial crisis, their central banks have been forced to move from conventional monetary policy – reducing policy rates via open-market purchases of short-term government bonds – to a range of unconventional policies. Although the zero nominal bound on interest rates – previously only a theoretical possibility – had been reached and zero-interest-rate policy (ZIRP) had been implemented, growth remained anemic. So central banks embraced measures that didn’t even exist in their policy toolkit a decade ago. And now they are poised to do so again.
The list of unconventional measures has been extensive. There was quantitative easing (QE), or purchases of long-term government bonds, once short-term rates were already zero. This was accompanied by credit easing (CE), which took the form of central-bank purchases of private or semi-private assets – such as mortgage- and other asset-backed securities, covered bonds, corporate bonds, real-estate trust funds, and even equities via exchange-traded funds. The aim was to reduce private credit spreads (the difference between yields on private assets and those on government bonds of similar maturity) and to boost, directly and indirectly, the price of other risky assets such as equities and real estate.
The Contradictions of Chinese Capitalism
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Then there was “forward guidance” (FG), the commitment to keep policy rates at zero for longer than economic fundamentals justified, thereby further reducing shorter-term interest rates. For example, committing to maintain zero policy rates for, say, three years implies that interest rates on securities with up to a three-year maturity should also fall to zero, given that medium-term interest rates are based on expectations concerning short-term rates over the next three years. Capping things off, there was unsterilized currency-market intervention to boost exports via a weaker currency.
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2008 Revisited?
2008 Revisited?
NEW YORK – The question I am asked most often nowadays is this: Are we back to 2008 and another global financial crisis and recession?
My answer is a straightforward no, but that the recent episode of global financial market turmoil is likely to be more serious than any period of volatility and risk-off behavior since 2009. This is because there are now at least seven sources of global tail risk, as opposed to the single factors – the eurozone crisis, the Federal Reserve “taper tantrum,” a possible Greek exit from the eurozone, and a hard economic landing in China – that have fueled volatility in recent years.
First, worries about a hard landing in China and its likely impact on the stock market and the value of the renminbi have returned with a vengeance. While China is more likely to have a bumpy landing than a hard one, investors’ concerns have yet to be laid to rest, owing to the ongoing growth slowdown and continued capital flight.
Second, emerging markets are in serious trouble. They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). Many are running macro imbalances, such as twin current account and fiscal deficits, and confront rising inflation and slowing growth. Most have not implemented structural reforms to boost sagging potential growth. And currency weakness increases the real value of trillions of dollars of debt built up in the last decade.
Third, the Fed probably erred in exiting its zero-interest-rate policy in December. Weaker growth, lower inflation (owing to a further decline in oil prices), and tighter financial conditions (via a stronger dollar, a corrected stock market, and wider credit spreads) now threaten US growth and inflation expectations.
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The Global Economy’s New Abnormal
The Global Economy’s New Abnormal
NEW YORK – Since the beginning of the year, the world economy has faced a new bout of severe financial market volatility, marked by sharply falling prices for equities and other risky assets. A variety of factors are at work: concerns about a hard landing for the Chinese economy; worries that growth in the United States is faltering at a time when the Fed has begun raising interest rates; fears of escalating Saudi-Iranian conflict; and signs – most notably plummeting oil and commodity prices – of severe weakness in global demand.
And there’s more. The fall in oil prices – together with market illiquidity, the rise in the leverage of US energy firms and that of energy firms and fragile sovereigns in oil-exporting economies – is stoking fears of serious credit events (defaults) and systemic crisis in credit markets. And then there are the seemingly never-ending worries about Europe, with a British exit (Brexit) from the European Union becoming more likely, while populist parties of the right and the left gain ground across the continent.
These risks are being magnified by some grim medium-term trends implying pervasive mediocre growth. Indeed, the world economy in 2016 will continue to be characterized by a New Abnormal in terms of output, economic policies, inflation, and the behavior of key asset prices and financial markets.
So what, exactly, is it that makes today’s global economy abnormal?
First, potential growth in developed and emerging countries has fallen because of the burden of high private and public debts, rapid aging (which implies higher savings and lower investment), and a variety of uncertainties holding back capital spending. Moreover, many technological innovations have not translated into higher productivity growth, the pace of structural reforms remains slow, and protracted cyclical stagnation has eroded the skills base and that of physical capital.
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The Europe Question in 2016
The Europe Question in 2016
NEW YORK – At the cusp of the new year, we face a world in which geopolitical and geo-economic risks are multiplying. Most of the Middle East is ablaze, stoking speculation that a long Sunni-Shia war (like Europe’s Thirty Years’ War between Catholics and Protestants) could be at hand. China’s rise is fueling a wide range of territorial disputes in Asia and challenging America’s strategic leadership in the region. And Russia’s invasion of Ukraine has apparently become a semi-frozen conflict, but one that could reignite at any time.
There is also the chance of another epidemic, as outbreaks of SARS, MERS, Ebola, and other infectious diseases have shown in recent years. Cyber-warfare is a looming threat as well, and non-state actors and groups are creating conflict and chaos from the Middle East to North and Sub-Saharan Africa. Last, but certainly not least, climate change is already causing significant damage, with extreme weather events becoming more frequent and lethal.
Yet it is Europe that may turn out to be the ground zero of geopolitics in 2016. For starters, a Greek exit from the eurozone may have been only postponed, not prevented, as pension and other structural reforms put the country on a collision course with its European creditors. “Grexit,” in turn, could be the beginning of the end of the monetary union, as investors would wonder which member – possibly even a core country (for example, Finland) – will be the next to leave.
If Grexit does occur, the United Kingdom’s exit from the EU may become more likely. Compared to a year ago, the probability of “Brexit” has increased, for several reasons. The recent terrorist attacks in Europe have made the UK even more isolationist, as has the migration crisis. Under Jeremy Corbyn’s leadership, Labour is more Euroskeptic.
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The Middle East Meltdown and Global Risk
The Middle East Meltdown and Global Risk
Among today’s geopolitical risks, none is greater than the long arc of instability stretching from the Maghreb to the Afghanistan-Pakistan border. With the Arab Spring an increasingly distant memory, the instability along this arc is deepening. Indeed, of the three initial Arab Spring countries, Libya has become a failed state, Egypt has returned to authoritarian rule, and Tunisia is being economically and politically destabilized by terrorist attacks.
The violence and instability of North Africa is now spreading into Sub-Saharan Africa, with the Sahel – one of the world’s poorest and most environmentally damaged regions – now gripped by jihadism, which is also seeping into the Horn of Africa to its east. And, as in Libya, civil wars are raging in Iraq, Syria, Yemen, and Somalia, all of which increasingly look like failed states.
The region’s turmoil (which the United States and its allies, in their pursuit of regime change in Iraq, Libya, Syria, Egypt and elsewhere, helped to fuel) is also undermining previously secure states. The influx of refugees from Syria and Iraq is destabilizing Jordan, Lebanon, and now even Turkey, which is becoming increasingly authoritarian under President Recep Tayyip Erdoğan. Meanwhile, with the conflict between Israel and the Palestinians unresolved, Hamas in Gaza and Hezbollah in Lebanon represent a chronic threat of violent clashes with Israel.
In this fluid regional environment, a great proxy struggle for regional dominance between Sunni Saudi Arabia and Shia Iran is playing out violently in Iraq, Syria, Yemen, Bahrain, and Lebanon. And while the recent nuclear deal with Iran may reduce the proliferation risk, the lifting of economic sanctions on Iran will provide its leaders with more financial resources to support their Shia proxies. Further east, Afghanistan (where the resurgent Taliban could return to power) and Pakistan (where domestic Islamists pose a continued security threat) risk becoming semi-failed states.
Read more at https://www.project-syndicate.org/commentary/middle-east-meltdown-global-risk-by-nouriel-roubini-2015-10#uwWCfTGqdixqPq41.99
The Return of Currency Wars by Nouriel Roubini – Project Syndicate
The Return of Currency Wars by Nouriel Roubini – Project Syndicate.
NEW YORK – The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world.
Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies – or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.
All of this will lead to a strengthening of the US dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year. But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation.
Read more at http://www.project-syndicate.org/commentary/world-government-reliance-monetary-policy-by-nouriel-roubini-2014-12#sbgdimz14CWVVMDs.99
