BlogSpot - April 2nd, 2014
Low growth: it is not about austerity anymore...
The IMF finds that the world economy is continuing its slow recovery with the main impetus now lying with advanced economies. In its April 2014 WEO, the IMF highlights the implications of increased financial volatility in emerging market economies, lower-than-expected inflation in advanced economies, and the withdrawal of monetary accommodation, with analyses focused on the causes of worldwide decreases in real interest rates since the 1980s and on the factors behind the fluctuations in emerging market economies’ growth, including the role of China.
With the debate decidedly shifting towards growth issues, austerity is relegated to the background, notably in Europe:
In a VoxEu piece, Emanuele Baldacci et al. find that the main issue explaining the lack of growth in the European Union is financial: the not-so-recent-anymore financial crisis (rather than austerity measures too restrictive and poorly adapted to local conditions, as traditionally outlined by Paul Krugman). The lack of access to credit for households and small and medium enterprises has reduced the volume of private demand. Therefore, as governments are being forced to cut their spending in order to constrain the deepening of their fiscal deficits, the effects on growth are compounded (and even more since unemployment is high). Today, private demand is less able to compensate for the decrease in public demand.
For Pier Carlo Padoan (hat-tip EuroIntelligence), the European Union needs to focus on growth and on structural reforms adapted to the current macroeconomic environment. Consolidation alone might not be the best solution, especially since deflationary risks are worsening (as reported in our last BlogSpot).
Improving financing conditions could strengthen growth prospects while allowing governments to pursue their austerity measures. However, this outcome will depend on the October results of the ECB’s asset quality review and stress tests. They could either restore confidence in the banking system or further constrain access to credit.
A group of experts was asked by the European Commission to assess its proposals of a debt redemption fund and eurobills. According to Vesa Vihriälä (a group member), the only solution available to deal with the debt overhang problem is to create a debt restructuring mechanism backed up with either a temporary mutualisation scheme (as to avoid moral hazard) or a debt conversion scheme (using future seigniorage revenues to redeem debt). EuroIntelligence criticizes the lack of significant new conclusions.
Watch out for Abenomics—a source of eurozone deflation?
Started in 2012, Japan’s Abenomics are still to show their full effects.
The first two arrows have shown mixed results. First, inflation expectations have risen only moderately. As reported by Karl Smith in FT Alphaville, the first “arrow” (aka the increase in the monetary base) only managed to raise inflation expectations by 1 percentage point, insufficient to bring the inflation rate to the desirable 2%. Besides, even though the Yen has fallen by more than 25% relative to the U.S. $, real exports are decreasing as manufacturers are taking advantage of the currency’s depreciation to price to market and increase their profit margins. Second, growth effects have been limited. While a recent paper by the Brookings Institution shows that policies, in particular the “monetary regime change,” have the potential to foster growth, Dan Steinbock (in EconoMonitor) underlines that growth has disappointed. These apparent failures of the first two “arrows” could be driven by demographic effects, i.e., the continuous decline of the Japanese working age population.
Tyler Durden (from Zero Hedge) is more pessimistic as he notes that regular pay fell for the 21st straight month by 0.3% and real wages dropped an annual 1.9% in February. James Mackintosh adds that the upcoming consumption tax hike is unlikely to raise inflation because (1) it would undermine investors’ sentiment and (2) Japanese firms’ higher profit margins are unlikely to translate into wage increases during the spring wage talks. Without a growth in wages, consumption will not be boosted and the tax hike could actually bring about recession in the country. The Wall Street Journal goes a step further and writes that Japanese monetary policy is a cause eurozone’s deflation threat, a claim disregarded by Marc to Market.
The last remaining – third – “arrow” (aka structural reforms) will be launched this year. The question is whether it will lead to debt stabilization.
Mixed views on the IMF’s Ukraine program
Joseph P. Joyce (EconoMonitor) questions the main elements of the IMF program with Ukraine, described as very ambitious (in this second EconoMonitor piece) : The program is designed to meet Ukraine’s critical near-term financing needs and ignite a series of structural reforms. It incorporates (i) a commitment to maintain a flexible exchange rate system, (ii) increases in energy prices by 50%, (iii) a passage of a budget for 2014, and (iv) a commitment to anti-corruption legislation thought to improve the business climate. These conditions were essential to secure resources. Peter Boone and Simon Johnson worry that corruption and Russia’s influence will undermine the program. This first step taken by the IMF should lead to the release of several other financial packages to Ukraine. The European Union and the World Bank are expected to send between $6 and $8 billion and Japan has decided to provide $1.5 billion in economic aid, as recalled by Yuriko Koike in Project Syndicate. This financial assistance should help Ukraine service its debt and alleviate fears of a debt restructuring.
The Short View... A bleak future for capitalism.
According to the latest book by Thomas Piketty, reviewed in a Bruegel article, inequality is (re-)established as the most pressing economic issue of our time.
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