- 2018-09-19
Is the global recovery real and fragile?
The world economy is in a stage of strong growth. It did not grow as fast as it did during 2003 to 2007, but given the way that surge ended, we should be grateful for it. The growth in 2017 and the International Monetary Fund's (IMF) growth forecasts for 2018 and 2019 are higher than any year after the crisis-except for the post-crisis recovery in 2010 and 2011. However, this is a period of fragile recovery.
In its latest World Economic Outlook (World Economic Outlook), the IMF has raised its forecasts of world economic growth for this year and the next, which are both 0.2 percentage points higher than the forecast in October 2017. The economic growth forecasts of advanced economies in 2018 and 2019 are increased by 0.5 percentage points and 0.4 percentage points, respectively. The United Kingdom is the only country in the Group of Seven (G7) that has not been revised upwards. This is the early price of Brexit. In view of the protectionist noise in the United States, perhaps the most striking is the upward revision of forecasts for growth in the scale of world trade. The forecast for 2018 trade volume is increased by 1.1 percentage points, and the forecast for 2019 is increased by 0.8 percentage points.
The two main reasons for the strong momentum of world economic growth and the growing optimism about short-term prospects are that policies are still highly supportive, and since the collapse of commodity prices in 2014 and 2015, the world has not suffered a huge negative economic shock. The market expects that the US policy rate will rise faster than in October last year. Even so, monetary policy is not tight by historical standards: even by the beginning of 2021, the expected policy interest rate is still below 3%. This optimism is mainly because inflation (especially wage inflation) is still in a static state, despite the low unemployment rate. Other high-income economies lag far behind the United States in terms of austerity policies.
In addition to this still highly supportive monetary policy, we must also consider the US tax cut policy without financial support, which is a huge procyclical fiscal stimulus. The Congressional Budget Office predicts that the U.S. federal deficit will average less than 5% of gross domestic product (GDP) between 2019 and 2027. This gun-and-butter policy in a fully-employed economy reminds us of the late 1960s and early 1970s. The ending of that period was terrible. The IMF's view is not that disastrous. It just believes that the US fiscal policy overdrafts future growth.
What are the risks of such an optimistic view of the future? The IMF believes that in the short term, they have pros and cons.
On the positive side, strong confidence may boost investment and consumption more than expected. Stronger investment may also lead to stronger productivity growth, which may lead to lower-than-expected inflation. On the downside, an unpredictable policy environment and related market turmoil may trigger a sharp drop in confidence, leading to weaker demand. One vulnerable place may be the Eurozone, as Gavyn Davies pointed out, Eurozone growth is now unexpectedly slowing down.
However, in the longer term, the risks seem to be biased towards the negative. It is true that due to the late acceleration of productivity growth and the increasing convergence between developed and emerging countries, we may be entering a period of sustained rapid growth. However, the negative risks are stronger.
The ratio of debt to world GDP is now as high as it was ten years ago, but its composition has changed: toward government and non-financial companies, household and financial sector debt reduction. The prices of important assets have also risen. The IMF pointed out: "Credit risks may be suppressed, while global growth is strong, and lending rates are at low levels." However, if inflation unexpectedly rises, monetary policy tightens more than expected, and the maturity premium of bonds rises, the debt problem will reappear. , It may even be catastrophic. If this happens, the central bank's response space will be limited. In addition, the IMF pointed out that the rapid growth of "encrypted assets" and cybersecurity breaches can be destructive.
In addition, the global political situation is very tense. According to forecasts, due to fiscal stimulus, the US current account deficit will increase rather than shrink, which shows the ridiculous theoretical framework of US trade policy. This will not stop US President Donald Trump from blaming foreigners for treachery. As the IMF economic adviser Maurice Obstfeld said in a striking remark: “The trading system based on multilateral rules that has developed after World War II and promotes unprecedented growth in the world economy needs to be strengthened. As a result, it has to be strengthened. There is a danger of being torn apart." The IMF is the product of a more sensible era. It reminds us that this is appropriate.
When a rising superpower challenges an existing superpower—and when the latter opposes the global system it has created—it is absurd to be complacent. If anyone wants to understand the politics behind this chaos, it would be helpful to look at changes in labor force participation rates in developed countries. Between 2008 and 2016, the male labor force participation rate in almost every high-income country declined, while the female labor force participation rate in almost all countries increased. This is not a socially beneficial way to achieve greater gender equality. In addition, the United States did not see an increase in the female labor force participation rate during this period. Its labor market has been a disaster. This is just one aspect of a broader lesson: a family that is so severely divided financially is difficult to maintain.
Ten years ago, there was a crisis in our global system, but policymakers prevented it from developing into a systemic crisis. Now, in a period of cyclical recovery, we are facing such a systemic crisis. We are facing such a crisis in an era when both the economy and the politics are fragile. The recovery is real. Alas, fragility is also real.