There has been no post on the macro-economy in more than a year for the simple reason that there has been little upon which to comment. As we have long argued, growth in the developed world is going to be slow at best. And so it has proved to be true. The outlook for the next year is similar. The good news is that the threat of recession has abated; but secure and sustained growth at our best historical rates is unlikely. The reasons which account for persistently slow growth remain the same. Rising competition around the globe restrains employment levels. For example in the US, the number of people seeking to work has fallen sharply, explaining a primary cause for decline of the US unemployment rate. While the US has finally passed a budget, it is too soon to declare that America has stepped back from complete political dysfunction. And all of its long term problems await. Europe continues to make small progress, even as some of its states drift along, one millimetre from disaster. Political and military tension in and around the Ukraine merely adds to the uncertainty. India is now in one of its frequent periods of political paralysis, with most of its long term challenges unaddressed. China is holding its own for the moment, as its authoritarian government continues to struggle with the country’s inherent contradictions. We should keep in mind that about half of China’s GDP and employment arise from its state-owned enterprises. Its commitment to the marketplace remains half-hearted at best.
The most fundamental reason that the world’s political institutions are struggling to create coherent policy is because they are all having to adjust to a global economy. This is a radically new circumstance, the entire planet recently stitched into a web of commerce, finance and communication. How to cope challenges us all.
It is important to note that this anemic growth is occurring even though we are fueling the economic engine with extraordinarily low interest rates. It is as if we pouring gasoline on a slowly smoldering fire and the embers just burn a bit more brightly. Where is the fire? Clearly the fuel is water-logged with the problems noted above. With interest rates at near zero, all we get is slow growth!
Overlaying all the factors that account for slow growth is the greatest economic uncertainty of all: what will happen when the world’s central bankers start to remove the monetary stimulus that is giving us such low rates. Such historically low levels cannot be sustained indefinitely, one presumes. Surely inflationary pressure will increase. Or will it? Or have we killed inflation for a generation? Or is inflation about to erupt with a vengeance? But would that at least mean growth is seriously accelerating? Or might we get low growth and high inflation? The plain truth is that the situation is so dynamically complex and so unprecedented, we cannot answer any of the above questions with any reasonable degree of assurance. We can guess or we can hope. But that is not forecast.
But let us guess that as growth starts to accelerate and inflation moves up modestly, the central bankers will respond with measured, that is, small steps. That much might be clear. But we have no way of knowing what will happen next. Will investors panic or stay logically calm? Will real investment come to a halt? What happens to consumption of big-ticket items like cars? What happens to the world’s property markets? What happens if we stay calm when the bankers start withdrawing the stimulus and then freak out when it becomes clear they might spend the next five years raising interest rates? Slow torture? Again, there are no rigorous evidence-based answers to these questions.
Welcome to a world with economic uncertainty higher than it has ever been since the Second World War.