Thoughts on the Global Economy – from Across the World
At the end of last week, I spoke at two global conferences: one was the Global Financial Conference 2019 in Seoul where I spoke alongside the former Chief Economist of the IMF, Maurice Obstfeld, and then on the Shores of Lake Como, at what the Daily Telegraph called the “euro Davos”, featuring the Italian business elite and policymakers from around the world.
There, I spoke on Friday about the outlook for China and India in a session on emerging economies. The others on my panel were the World Bank’s Chief Economist Pinelopi Goldberg, Lord Jim O’Neill, Trevor Manuel, the former Finance Minister of South Africa, and Mehmet Simsek, former Deputy PM of Turkey.
On the Saturday, I spoke in a session on the ‘Future of Europe’, sharing the podium with a former Prime Minister of Italy, The Central Bank Governor of France and a minister from Germany. Here are some of my takeaways from these events.
Broadly, delegates agreed to disagree
At both conferences there was an acceptance that the world economy was slowing but disagreement about what lay ahead. If anything, I returned from these conferences feeling that we should retain our current view about the global economy: namely that global growth will be weaker than last year but still strong enough to allow unemployment rates to fall.
Economies, however, may not have sufficient momentum of their own and will need to be helped by policy stimulus, as central banks reverse or postpone previous plans to tighten and pressure builds across many countries for more government spending or tax cuts. One debate in Italy was not whether central banks need to do more – there was agreement on that – but whether there was scope for greater fiscal activism, given high debt levels across the globe.
In saying this, there was no doubt that at both conferences the downside economic risks were seen as significant. Recession was viewed as a genuine possibility by some. But for that to happen would, it seems, require some major policy mistakes, in turn contributing to a loss of confidence. This is possible, but not guaranteed. The challenge is that looser monetary policy, aimed at helping economies, may spark financial markets to head to new higher levels that they cannot sustain.
The longer-term picture also generates uncertainty
It is not just the immediate cyclical outlook that is generating uncertainty; so too is the longer-term picture. More of global growth is coming from the Indo Pacific region, stretching from India to the US. Within this, particularly in Asia, there is increasing focus on the G2 relationship between the US and China, whether it be the expectation of a resolution to their trade dispute now or how they might handle likely geopolitical tensions in coming years. In Korea, the biggest worry was that the global governance framework was not effective and that there was a need to restore the international order, based on multilateralism.
Similar concerns would not have gone amiss at the event in Italy, although there the mood varied. The session on the advanced economies was cautious, including concern that there was limited policy space to fight the next recession. In contrast, the session on emerging economies at which I spoke was more positive, although clearly the outlook diverges greatly across the globe.
I outlined how policy is being used more effectively in China, and the economy may well have hit bottom in the first half of the year, while India, perhaps helped by the imminent general election, may grow solidly this year and next.
The prominence of the future of Europe
The ‘Future of Europe’ grabbed the main focus of attention in Italy, including Brexit and what this means for not just the UK, but the euro area, too. The image of Brexit from afar is not as good as it could be. Whether on the Continent or in Asia, they witness political chaos and ineffective leadership in Westminster. Equally worrying is that the UK Government has not conveyed a positive global vision of what lies ahead. Thus, many are just waiting to see how things unfold in the UK, and are not rushing to take a strong view.
In Italy, it was noticeable how much of a divide there is between the present government and business; perhaps this is not a surprise as Italy is the only western economy where income per person is lower in real terms (that is, after allowing for inflation) than it was in 2000.
Despite this, the view among delegates was that the European Central Bank (ECB) was doing a good job. This is despite the slowdown in the euro area last year being partially triggered by premature policy tightening by the ECB as it started to withdraw its stimulus, as well as by a deceleration in global trade. There is some nervousness about what lies ahead, but latest data suggests an apparent cyclical recovery in the euro area this year, with modest growth. Moreover, with elections to the European Parliament imminent, there is acute awareness of more oxygen being given to euro-sceptic parties.
Problems within the euro area are all too often attributed to national factors, and the solution put forward is usually for greater centralisation. One can understand this in the case of capital markets and banking union, which it is felt are being held back at the national level. In terms of the banks there is little doubt the US and UK are in far better shape than the euro area.
There is a similar debate regarding competitiveness, which is seen as a national competence, with education and innovation two of the key drivers. An effective carbon tax was another example. One can sense that the age-old challenge is whether the centre needs to complement what goes on at a national level, or assume competency for it.
Thought-provoking views on fiscal policy
The most interesting issue at Lake Como was, in my view, over fiscal policy. One view, from Japan, was that fiscal policy can be used far more in Europe and elsewhere, particularly if growth rates exceed the rate of interest. In contrast, there was a fear that too much use of fiscal policy may deter reforms. In fact, in a separate debate, one European central bank governor called for Germany to relax fiscal policy.
An underlying key issue is how the UK and the euro area can position themselves best in the changing and growing global economy, and an increasing recognition that it will require more radical measures to try and break out of the slow growth phase Europe is in.
Overall, the thinking underpinning views at both events seems to have been reflected in the latest forecasts from the International Monetary Fund (IMF), whose half-yearly meeting (the Spring Meeting) is just beginning in Washington. The IMF often gives the impression of being more at home talking about downside risks. The unexpected rebound in the world economy from mid-2016 initially took them by surprise, as too did the downturn from last summer.
Since then they have been revising down their forecasts. After 3.6% growth last year, the IMF expects growth of 3.3% this year, before returning to 3.6% in 2020. A slowdown, not a collapse. Although, as they said, the world economy is at a delicate juncture. That thinking is reflected in the markets, too.
Please remember that when investing your capital is at risk.
There, I spoke on Friday about the outlook for China and India in a session on emerging economies. The others on my panel were the World Bank’s Chief Economist Pinelopi Goldberg, Lord Jim O’Neill, Trevor Manuel, the former Finance Minister of South Africa, and Mehmet Simsek, former Deputy PM of Turkey.
On the Saturday, I spoke in a session on the ‘Future of Europe’, sharing the podium with a former Prime Minister of Italy, The Central Bank Governor of France and a minister from Germany. Here are some of my takeaways from these events.
Broadly, delegates agreed to disagree
At both conferences there was an acceptance that the world economy was slowing but disagreement about what lay ahead. If anything, I returned from these conferences feeling that we should retain our current view about the global economy: namely that global growth will be weaker than last year but still strong enough to allow unemployment rates to fall.
Economies, however, may not have sufficient momentum of their own and will need to be helped by policy stimulus, as central banks reverse or postpone previous plans to tighten and pressure builds across many countries for more government spending or tax cuts. One debate in Italy was not whether central banks need to do more – there was agreement on that – but whether there was scope for greater fiscal activism, given high debt levels across the globe.
In saying this, there was no doubt that at both conferences the downside economic risks were seen as significant. Recession was viewed as a genuine possibility by some. But for that to happen would, it seems, require some major policy mistakes, in turn contributing to a loss of confidence. This is possible, but not guaranteed. The challenge is that looser monetary policy, aimed at helping economies, may spark financial markets to head to new higher levels that they cannot sustain.
The longer-term picture also generates uncertainty
It is not just the immediate cyclical outlook that is generating uncertainty; so too is the longer-term picture. More of global growth is coming from the Indo Pacific region, stretching from India to the US. Within this, particularly in Asia, there is increasing focus on the G2 relationship between the US and China, whether it be the expectation of a resolution to their trade dispute now or how they might handle likely geopolitical tensions in coming years. In Korea, the biggest worry was that the global governance framework was not effective and that there was a need to restore the international order, based on multilateralism.
Similar concerns would not have gone amiss at the event in Italy, although there the mood varied. The session on the advanced economies was cautious, including concern that there was limited policy space to fight the next recession. In contrast, the session on emerging economies at which I spoke was more positive, although clearly the outlook diverges greatly across the globe.
I outlined how policy is being used more effectively in China, and the economy may well have hit bottom in the first half of the year, while India, perhaps helped by the imminent general election, may grow solidly this year and next.
The prominence of the future of Europe
The ‘Future of Europe’ grabbed the main focus of attention in Italy, including Brexit and what this means for not just the UK, but the euro area, too. The image of Brexit from afar is not as good as it could be. Whether on the Continent or in Asia, they witness political chaos and ineffective leadership in Westminster. Equally worrying is that the UK Government has not conveyed a positive global vision of what lies ahead. Thus, many are just waiting to see how things unfold in the UK, and are not rushing to take a strong view.
In Italy, it was noticeable how much of a divide there is between the present government and business; perhaps this is not a surprise as Italy is the only western economy where income per person is lower in real terms (that is, after allowing for inflation) than it was in 2000.
Despite this, the view among delegates was that the European Central Bank (ECB) was doing a good job. This is despite the slowdown in the euro area last year being partially triggered by premature policy tightening by the ECB as it started to withdraw its stimulus, as well as by a deceleration in global trade. There is some nervousness about what lies ahead, but latest data suggests an apparent cyclical recovery in the euro area this year, with modest growth. Moreover, with elections to the European Parliament imminent, there is acute awareness of more oxygen being given to euro-sceptic parties.
Problems within the euro area are all too often attributed to national factors, and the solution put forward is usually for greater centralisation. One can understand this in the case of capital markets and banking union, which it is felt are being held back at the national level. In terms of the banks there is little doubt the US and UK are in far better shape than the euro area.
There is a similar debate regarding competitiveness, which is seen as a national competence, with education and innovation two of the key drivers. An effective carbon tax was another example. One can sense that the age-old challenge is whether the centre needs to complement what goes on at a national level, or assume competency for it.
Thought-provoking views on fiscal policy
The most interesting issue at Lake Como was, in my view, over fiscal policy. One view, from Japan, was that fiscal policy can be used far more in Europe and elsewhere, particularly if growth rates exceed the rate of interest. In contrast, there was a fear that too much use of fiscal policy may deter reforms. In fact, in a separate debate, one European central bank governor called for Germany to relax fiscal policy.
An underlying key issue is how the UK and the euro area can position themselves best in the changing and growing global economy, and an increasing recognition that it will require more radical measures to try and break out of the slow growth phase Europe is in.
Overall, the thinking underpinning views at both events seems to have been reflected in the latest forecasts from the International Monetary Fund (IMF), whose half-yearly meeting (the Spring Meeting) is just beginning in Washington. The IMF often gives the impression of being more at home talking about downside risks. The unexpected rebound in the world economy from mid-2016 initially took them by surprise, as too did the downturn from last summer.
Since then they have been revising down their forecasts. After 3.6% growth last year, the IMF expects growth of 3.3% this year, before returning to 3.6% in 2020. A slowdown, not a collapse. Although, as they said, the world economy is at a delicate juncture. That thinking is reflected in the markets, too.
Please remember that when investing your capital is at risk.
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