Global Economy: Recovery has not brought a boom, but there is a bright side too, says Meghnad Desai

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New Delhi | Published: June 20, 2017 6:38:07 AM

The recovery, from the turning point on the cycle nine years ago, has not brought a boom—but there’s no repeat of the decline either.

global economy, meghnath desaiMoney stays cheap in the developed countries, and thus the emerging economies do not face a crunch on their dollar liabilities. (Reuters)

The global economy is at a very peculiar stage. There seems to be a change in gear of public policy. Nine years after the Lehman Brothers crash, recovery seems to be complete in the Eurozone. There is a small but positive rate of real GDP growth such as has already occurred in the US and the UK. There is a moderate revival in inflation, and it has just crossed the 2% target-level in many countries. The US Fed has just raised its rates by 25 bps and has stated that it will begin the tapering exercise slowly and surely. Surprise will be avoided. It would be interesting to see how the US and the global economy react to this. Of course, even now, the ECB is still actively pursuing QE as is Japan. The Bank of England has left its rates constant despite the rise in inflation and the squeeze on the real wage levels.

The big question now is : At what stage of the long cycle are we? If you take a long cycle perspective, which I find useful (not for forecasting but for understanding) , we were in a upward swing of a Kondratieff between early 1990s and 2008. A shorter upswing rap than normal. Previously, we had an upswing from 1945 to 1973 and downswing from 1973 to 1990. The 1970s had high inflation due to the rise in oil prices and the dollar going off gold. There was stagflation, and the late 1970s and first half of the 1980s were painful.

If you go by analogy, the nine years from 2008 to 2017 have not been as painful. At least, inflation has been low though unemployment has been high in the eurozone. Both the US and the UK maintained high employment with both being close to full employment for some years now. The US has a fall in labour force participation and hence long-term unemployment, which has not come in the official statistics. There is both a skill shortage and around 10 million long-term dropouts from the labour force who would benefit from skilling. In the UK, this problem does not exist, at least for now. British problems are in the medium-run, mostly of negotiating the Brexit. Now, with a weakened government under Theresa May, only a soft Brexit will be likely, but it will be five years before the shape of the post-Brexit UK economy become clear. For the US, the uncertainties stem mainly from Trump’s likely but unpredictable behaviour. He may not renew Janet Yellen as Fed Chair, but if he appoints a similarly serious and cautious person, all may be well. His economic programme has stalled and looks unlikely to come to fruition till next year end.

Thus, the recovery, from the turning point on the cycle nine years ago, has not brought a boom—but there’s no repeat of the decline either. The eurozone is in a deflationary monetary arrangement. It can only manage a revival in the growth rate by undergoing more painful adjustment. That would be Emmanual Macron’s plan. He wants to undertake deep reforms of the labour market, removing the 35-hour work-week and making hiring and firing easier. His likelihood of success depends on the majority he has just received in the Assemblée Nationale. But it is a moot point whether he succeeds in reforming the labour laws. Given the strength of the trade unions and the normal practices of French politics, the issue will be decided on the street and not in Parliament.

The eurozone is not homogenous. Germany has the opposite problem, of real wage repression, and there is a need for some reflation. It seems unlikely to be delivered as Angela Merkel is likely to get re-elected and will continue to be cautious. Italy is still facing an unresolved banking crisis and uncertain politics until the next election yields a definite majority for one party or another. Once Brexit is out of the way, there will be one more attempt to integrate the eurozone economies more closely. Even here, the Eastern European economies—Poland, Hungary , Czech Republic and Slovakia—may prefer a less complete integration. They may ask for a differential geometry as the British used to want.

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Money stays cheap  in the developed countries, and thus the emerging economies do not face a crunch on their dollar liabilities. The dollar continues to be strong, but not too much so. Thus, deleveraging need not be urgent. China is worrying because its debt situation is not transparent and one can never be sure that the monetary authorities are in full charge. We keep on hoping that China would make a safe landing in its transition from the old to the new economy. But there is a reluctance to shrink the old despite the excess capacity and unprofitability while the new is flush with borrowed money. Hopefully, the Chinese will not crash.

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