There was a collapse on the Shanghai stock market which led the Chinese government to pump millions of dollars of liquidity to retrieve prices. For anyone with a sense of history, the mind will cast back to Wall Street in 1929, when the authorities desperately tried to revive the stock market and failed with well-known consequences. Gold price has collapsed as much as the oil price.
Indeed, gold and oil prices are highly correlated. Dollar, on the other hand, correlates negatively with them both. The strength of the dollar has surprised Janet Yellen. The Federal Reserve dithers whether to begin tightening the yield even by as little as 25 basis points. Mark Carney, the Bank of England Governor, is more confident of raising interest rates sooner. The ECB cannot remotely envisage tightening while Greece is causing so much angst in the Eurozone.
The IMF has warned that the new normal will be a low-GDP-growth, low-inflation scenario. I would label it the downswing of a Kondratieff long cycle. This may last anything up to 20 years. Only the US and UK are showing above 2% GDP growth among the Western developed countries. China has slowed down and if the Shanghai collapse is more serious than the authorities want us to believe, it may be in a tailspin.
The global economy is without doubt at a very peculiar juncture. The easy money policies adopted by the major central banks have now lasted seven years. Interest rates in those countries are practically zero. The huge amount of money pumped out has caused neither inflation nor output growth. Some of it has gone global in search of higher yields. A lot of it is churning around in the mergers-and-acquisitions market. Companies are buying and selling old equity, but not making new investments. Buyouts and takeovers are taking place at highly inflated prices. Indeed, the values in M&A have reached the previous peak of 2007. This cannot be a healthy development.
The moderate GDP growth reflects a slowdown in productivity growth. There is much worry about raising productivity growth back to what it was before the crisis. Education and skilling closer liaison between business and universities, better patents regime, help for start-ups have been listed as the ingredients for raising productivity.
Even so, the world is also waiting for the next burst of Schumpetarian innovations to raise the growth rate secularly.
Driverless and/or electric cars, robotics, new breakthrough in medical and pharmacy research arising from DNA mapping, faster and smarter electronic devices, solar-powered airplanes—the list can be stretched. There is however no sense of a revolutionary change in the production structures.
Could it be that before the global economy revives, it could go down again? That would be a short cycle of 8-10 years, 2008-2018 , which will dovetail with the long downturn of 20-25 years. It is difficult to be sure, but the signs are of a slowdown rather than acceleration of growth across the globe. The Eurozone is a massive drag and is unlikely to register 2% growth in the near future. The UK economy is forecast to grow at 2.5% for the next five years but there are problems. Household savings (pension payments excepted) has dropped to near zero per cent. Household debt is rising again as are house prices.
Of the BRICS economies, only India is on the up. If the various legislative obstacles that the government faces were to be cleared, expectations will improve. As it is, a better monsoon, lower inflation and a resultant interest rate cut are the only likely route to a revival.
India’ s good growth performance in the 2000-2007 period was on the back of the global boom. If now India has to swim against the current to achieve higher growth, it would need a much more radical policy mix than is on the cards. So far, the idea seems to be that to get back to high growth only decisive executive action is needed and then the earlier growth trajectory will resume. This is a risky strategy. If, by any chance, the world has another recession, it will drag India with it. After all,India gained from the global boom before 2007. It could yet again be dragged down by the global economy.
There was a time when it looked likely that BRICS would provide an engine of growth for the global economy. Despite much growth of the emerging economies, the majority pull forces remain with the developed economies. They could be losing their momentum. They could take the BRICS with them.
The author is a prominent economist and Labour peer