GLOBAL GROWTH: A MIXED PICTURE
GLOBAL GROWTH: A MIXED PICTURE
Too slow for too long… Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long—as reported by the IMF in its World Economic Outlook (see the blogs Economist’s View and Econ Browser for example). The IMF expressed significant worries about the global economic, as reviewed by EuroIntelligence, in particular about secular stagnation if financial turmoil is triggered through exchange rate depreciations; the oil price falls further; a sharper than expected slowdown of China; non-economic shocks, from geopolitical conflicts, terrorism, refugee flows, epidemics, Brexit. This would leaves much less space for policy error. Winand von Petersdorff (FAZ) stress that industrialized countries do not make any progress when it comes to productivity, despite structural policy being one of the last available tools.
Lower risks? Market volatility looks to be subsiding according to Mark Schofield (Citi), on the backdrop of a mixed outlook for global growth, with lower deflation risks (see report) but a lower growth outlook (report)—expecting risk assets to maintain their somewhat better tone. Willem Buiter and Ebrahim Rahbari (Citi) reports from the Spring Meetings that a relief in the normalization in financial conditions and reduced concerns about a global recession. Erik Nielsen (UniCredit) notes that investors are again moving towards riskier assets, illustrated by large inflows towards EM-dedicated bond funds. From the IMF WEO, Nielsen sees that the global growth slowdown, in place since 2010, looks to come to an end this year.
Two concerns kept haunting markets: first, why productivity remains so poor, and whether we might have entered a state of secular stagnation (though, as highlighted by Claudio Borio in a BIS paper, low growth is partly caused by the ongoing pain of the misallocation of resources, particularly labor, following the “years of excess” rather than secular stagnation); second, the risk from the (structural?) slowdown in EM growth. Political risks are lower, according to Erik Nielsen (UniCredit), noting that populist parties in European are not doing so well and believing that Brexit remains an unlikely prospect.
Macro Market Musings contrasts worries from the IMF with more optimism from the Peterson Institute for International Economics (PIIE), and tends to support the former, because of the Fed’s policy, effectively a tightening since mid-2014, affecting the US economy and also the dollar block countries, especially as the dollar tightening is affecting China negatively with the trade-weighted Yuan to rise over 15% between mid-2014 and late-2015.
Policy complacency? Buiter and Rahbari (Citi) write that, despite IMF calls for concerted action, there were few prospects of major policy initiatives to support the economy, and that the recent calm may have reduced the sense of urgency for any such initiatives. Brad Delong (Economist View) looks at risks of a global recession: first, current levels of global inflation preclude dangerous rate hikes; second, financial risks, unknowable; and third, more worrisome, the risk of insufficient policy support. Martin Sandbu (Free lunch) reads the IMF’s WEO as a huge indictment of national policymakers—with the long list of measures left for policymakers, notably the structural front to be complemented by stimulative policies (FreeLunch).
The European fiscal framework
Continuing risks for Europe… Dan Steinbock (EconoMonitor) stresses, after reviewing the long list of economic risks, that European policymakers can no longer avoid hard political decisions for or against an integrated Europe, with or without the euro. Half-solutions adopted to avoid a collapse of the Euro may have paved the way for future crises, according to Jean Pisani-Ferry (VoxEU). He puts forward a few proposals regarding the Eurozone’s policies—a European Monetary Fund, an overhaul of surveillance, the completion of banking union, an insolvency procedure for sovereigns, and Eurobonds of some sort. The specificity of the euro, that it is a currency without a sovereign, calls for specific policies according to Agnes Benassy-Quere (VoxEU) especially as, unlike existing federations, it lacks the ability to deliver counter-cyclical fiscal policies while complying with fiscal discipline. Macroeconomic coordination will thus require rules, a strong and independent European Fiscal Board, and the strengthening of the ESM—in the direction of building a “shadow sovereign.” Resilience in Europe remains a source of concern, as highlighted by Francesco Saraceno (blog), from the ECB’s Annual Report.
The need for a revised fiscal framework. The current inefficient European fiscal framework should be replaced with a system based on rules that are more conducive to the two objectives of public debt sustainability and fiscal stabilization, as argued by Gregory Claeys and Zsolt Darvas (Bruegel, based on their recent policy contribution). They propose to get rid of the opaque web of flexibility clauses in current fiscal rules, and use a rule monitored by national fiscal councils and a newly-established independent European fiscal council. Darvas (Bruegel) insists that a current key indicator in the EU’s fiscal framework, the structural budget balance, is imperfect, subject to frequent revisions, and concerns among some EU finance ministers as noted by Gabriele Steinhauser (RealTime Brussels). Hence their suggestion to eliminate fiscal rules related to the structural balance (article).
The Short view: Tax rules and the Panama papers… The Commission coincidentally released its plans for tax transparency for multinationals, presented by Commissioners Valdis Dombrovskis, Jonathan Hill and Pierre Moscovici in Le Monde and La Stampa and The Guardian. Pia Huttl and Alvaro Leandro (Bruegel) have an interesting BlogSpot on the implications of the Panama Papers.
