THE English poet Percy Bysshe Shelley, I well recall, once asked: If winter comes, can spring be far behind?
For the best part of the last ten years, the global economy has yet to see its real spring. At last in early 2017, we see some green-shoots sprouting more visibly in the United States and Europe, and even in the emerging market economies (EMEs) including Russia and Brazil, already marred by recession in 2015-2016. It was also a time of high political drama, plunging Washington DC into a Nixon-style crisis. Yet, the US Vix “fear” index of volatility for US stocks sank below 10 (lowest since 1993; up to 20 is regarded as normal), signalling calm in both the economy and markets.
So, it is not surprising that the tracking index of the US Brookings Institution and the London Financial Times released in early April 2017 indicated that the global economy has finally become more broad based and stable, even benign than anything seen for 24 years. Their Tiger Index gauges performance by comparing many indicators of real activity, financial markets and investor confidence against historical averages.
The latest findings suggest that: (i) growth has picked up sharply in the main advanced economies (AEs); (ii) EMEs’ growth has climbed to its highest since early 2013; (iii) AEs have since moved above historical average growth levels; but (iv) fears remained, as political ferment, protectionism and failure to reform could throw nations off-course.
The International Monetary Fund (IMF) and the World Bank have reinforced this optimism at its spring 2017 consultative meetings by reporting signs of a consistent (but far from stellar) global recovery that appears to be gathering momentum – after six years of disappointing growth.
The IMF has (for once) upgraded modestly world growth to 3.5% in 2017 and 3.6% in 2018; and maintained growth in EMEs at 4.5% (2017) and 4.8% (2018). The World Bank’s outlook for East Asia and Pacific stays broadly positive, with poverty continuing to fall. China’s growth will now slow down to 6.5% (2017) and 6.3% (2018); with India at 7.2% and 7.8% respectively, while growth in South-East Asia rises to 5% in 2017 and 5.2% in 2018.
Still, I remain concerned that the underlying growth dynamics in many AEs and EMEs remain weak, reflecting still soft investment outlays and sluggish productivity gains. Political tension, populist nationalistic and protectionist politics, and other diverse sources of stress are likely to undercut recovery in 2018 and beyond.
The Paris-based Organisation for Economic Co-operation and Development (OECD), however, has since injected a note of caution. Its early May release of Leading Indicators pointed to a setback on hopes that 2017 could mark a breakout year for the global economy. Growth in the major AEs, including the United States, United Kingdom and France appeared to have slackened, although it picked up in Germany. China’s growth also steadied, with only India set to see a turn for the better.
It’s worth noting that these OECD indicators are designed to provide early signals of turning-points between expansion and contraction of economic activity. They track a variety of data that have a history of anticipating swings in future activity – with a lagged impact of six to nine months later.
Similarly, the Institute of International Finance (IIF) warned against reading too much into the rising cross-border inflows of capital into bonds and equities in EMEs – they topped US$20bil for the third consecutive month in April 2017. Here again, it’s worth noting that of the original BRICS, Brazil and Russia are still struggling to get out of deep recession. Last to join South Africa is doing its darnest to keep its economy down.
Growth in China is slackening, still marred by a looming debt crisis. Only India offers promise. So, why the strong inflows? I see them as reflecting: (i) a cyclical upturning in the global economy – but cyclical turns are not reliable; they can reverse just as quickly; (ii) the massive injection of central bank liquidity; but room for upside is now limited; and (iii) the persistent savings glut. Still credit markets remain “frothy” and US Fed actions could surprise – but if the threat of higher US rates recedes, so will the threat of capital outflows from EMEs. The situation stays fluid.
US dollar shortage?
Also, watch out for the risk of a scarcity in US dollar outside the United States, warns the Bank for International Settlements (BIS). This arises when the Fed opens its door to further unwinding its multi-trillion quantitative easing stimulus programme (having built-up a US$4.5 trillion balance sheet).
Once the Fed slows down its purchases of securities, US dollars pumped and released around the world will start to disappear. US dollar could also be drawn back to the US under any tax amnesty to repatriate profits held overseas. Already, money market rates suggest greenbacks are getting scarce. Non-US investors are already paying a premium to swap their funds into US dollar via cross-currency basis swaps.
The US dollar has been riding high, even towards parity at one time, with the euro beset by populist threats. But terms of the US dollar-euro equation are shifting on both sides of the Atlantic. There is political turbulence emanating from the White House since May.
In Europe, however, political risk has since receded and growth in eurozone looks relatively buoyant. This has started to reverse portfolio outflows favouring the euro as its central bank tapers. Still, Europe’s politics can remain troublesome. As of now, the euro is in the driver’s seat with European Union’s growth expected at 1.9% both in 2017 and 2018 (1.6-1.7% previously) – its fifth consecutive year of growth (albeit, at low rates).
Despite the US equity markets hitting multi-year highs, consumer sentiment staying buoyant and the labour market at full employment, productivity remains lacklustre – worker productivity fell 0.6% since January 2017. History: 1950-1970, + 2.6% (average per annum); 1970-1990, +1.5%; after IT boom of the 1990s interrupted the slide, it has since fallen to roughly 0.6% a year. It’s variously estimated that if productivity growth had not slowed, GDP would be up by about 5%, or US$3 trillion more than it is today. Why so in the face of evolving technological change: because (i) metrics used fail to adequately capture the impact of advances in IT, communications and bioscience; (ii) Prof Robert Gordon’s contention that today’s innovations are “not as great” as those in the industrial revolution – they being now more incremental than transformative; and not sufficiently robust to counter slowing population, rising inequality, and exploding debt; and (iii) growth dividends from disruptive technology takes a long, long time to have full impact.
What’s clear is that continuing weak productivity growth can work to seriously undermine the rise in global living standards
I see China’s much publicised One Belt One Road (OBOR) initiative as offering a new way to promote globalisation – one that’s more inclusive and fairer than previous tides of world commerce. It already spans 65 nations, representing 60% of world population and 35% of global GDP.
It’s a reboot of the silk-road of old, harked back to the ancient caravan and maritime routes dating back two millennia that carried ideas and goods between civilisations. The modern day version plans to knit Asia, Europe and Africa more closely through infrastructure-building, across a swath of the world in a bid to promote an open platform of cooperation in freer-trade and reshape the geopolitical and economic world order.
I gather the plan is to build roads, rails, ports, pipelines and other infrastructure joining China to Central Asia, to Eastern Europe, and onto East Africa by land and sea. Spurs from the overland “belt” and the maritime “road” reach into Southeast Asia and towards the Indian Ocean.
It’s a new way to boost global sustainable development, at a time when the world is struggling with middling economic growth and stalling trade volumes, amid rising populist rhetoric of nationalism and protectionism. Lower trade barriers, aid and regulatory harmonisation are, quite rightly on the agenda alongside infrastructure.
Certainly, EMEs can benefit from better and more infrastructure and deeper trading relationships. There is potential for it to do a lot of good for mutual benefit. China has since mid-May 2017 pledged another US$124bil for the programme, over and above the US$50bil already invested. Projects are mainly funded through the Asian Infrastructure Investment Bank, which has 77 member nations. OBOR plays to China’s strength – it has more savings than it can invest at home, and commands vast experience and capacity in building big projects which it intends to share.
What then, are we to do
Who created the recovery? in a world where investors appear to have lost perspective on events, because even the bizarre today seems almost normal. It’s all very strange. As I see it, an endorsement of populist economics would favour the wrong source – indeed, Trump’s tax cuts would prime pump a full employment economy that now least needs support, and complicate life for Fed chief Yellen. Populists don’t deserve credit for the upsurge.
But that’s not the real point. To me, what’s worrisome is the possibility that economic dynamism and entrepreneurship are no longer driving economic growth, especially in the US and Europe.
IMF now talks of a productivity trap – that another decade of weak productivity will hamper living standards. Hope rests on a new wave of technological breakthroughs – driven by artificial intelligence and robotics. In the meantime, much depends on continuing deep investments in education and training, as well as in infrastructure works.
IMF studies suggest that (a) 1% rise in the share of immigrants in a population can raise productivity by 3% in the long term; and (b) 1% fall in tariffs on inputs can raise productivity by 2%. But there are huddles – an aging workforce, rising protectionism, curbs on immigration and mounting debt. These can easily snuff out any upsurge.
My take is that the longer the Vix stays low and the more peculiar the position of politics and markets remains, the higher the risk of a future snapback.
Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015). Feedback is most welcome; email: firstname.lastname@example.org.