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Taking a long term perspective, much has been made of the ‘secular stagnation’ notion made fashionable by Larry Summers in 2014. It may be that we are in the midst of a long cycle or facing a worldwide readjustment or purge, partly owing to the slowdown and change of model in the Chinese economy. Despite its rate of unemployment falling below 5% (4.9% in January), there is talk of a new recession in the US. According to Tyler Cowen, 75% of the jobs lost in the Great Recession have been recovered, but the remaining 25% still equate to two million people or a high level of structural unemployment that is not even reflected in the statistics because many people have left the labour market. The ratio between employment and the population in this vast economy has fallen. And the number of self-employed (or freelancers) accounts for more than 53 million people. The President of the Federal Reserve, Janet Yellen, has said that if the turbulence in the world’s financial markets continues, economic growth and employment in the US could be adversely affected.
Is the world economy grinding to a halt? Even the International Monetary Fund (IMF), which for the third time in 12 months has revised the prospects for global economic growth downwards (to 3.4% for 2016), warns in its most recent report of ‘a generalized slowdown in emerging market economies, China’s rebalancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States. If these key challenges are not successfully managed, global growth could be derailed’.
The greatest suffering is being inflicted on the emerging economies. With the exception of China, India and a few others, their excessive dependence on exporting raw materials means that their economies have slowed down, and they have liquidity problems. The Financial Times has argued that the time has come to stop talking about BRICs (Brazil, Russia, India and China and, according to some, South Africa), and replace them with TICKs (Taiwan, India, China and South Korea), all economies committed to technology.
According to Joseph Stiglitz, the QE (Quantitative Easing) instigated by the Federal Reserve in the US and by the Central European Bank has created wealth in the financial sector but has done little for the real economy, whether European, US or global. It has barely stimulated consumption, public and private investment or growth. And according to the BIS (Bank of International Settlements), loans to emerging markets, which were the basis of their growth over the last 15 years, have dried up completely, partly owing to the crisis and the over-indebtedness to which these economies succumbed, and also to the (meagre) increase in interest rates in the US, with a reversal of capital flows. There is fear of default on sovereign debt, with Venezuela’s topping the list. Meanwhile critical scrutiny has once again turned to certain banks and in particular a group of German institutions.
At the beginning of this month Christine Lagarde, the IMF’s Managing Director, called on central banks to coordinate with each other to bolster themselves in the face of the crisis of the emerging economies. She warned that there are flaws in the system that are distorting the global economy.
China, whose economic performance has become to a large extent ‘the’ global problem, although its authorities flatly refuse to acknowledge it, has a combined public and private debt that exceeds 300% of GDP, and a great deal of capital is leaving the country. Its vast currency reserves are being whittled away in the efforts to prop up the yuan and in a surfeit of foreign acquisitions, although there are still years of supply left. For some however, such as Ha-Joon Chang, professor of economics at Britain’s Cambridge University, China is not the only one to blame. According to him, the developed economies have not learnt the lessons of 2008 and the Great Recession, adding, ‘the truth is there has never been a real recovery’.
The fall in the price of oil, which has now started turning from a boon into a headache, is due not only to the Chinese slowdown, but also to the change of the energy scenario in the US, more gas-focused and an importer-turned-exporter. Although it went largely unnoticed, the arrival in Europe (in Trieste, to be precise) of an oil tanker laden with American crude in January marked the first time in 40 years that the US had shipped oil as an export.
Although governments and central banks are running out of weapons (the Bank of Japan and even the Bank of Sweden have announced negative interest rates), the G20 should be the arena for a new coordination of economic policies. The G20 is currently being presided over by the Chinese, however, and does little, just when action is possibly more necessary than ever.