A growth recession?

Many now expect that, at best, we will have a “growth recession”, writes John Hewson.

The big economic surprise, post GFC, is that global growth has not recovered as much, nor as fast, as was predicted, especially with low or near zero interest rates, and mostly still accommodating budgetary policies.

Indeed, it is instructive just how often forecasts of global growth have fallen short of the mark, quarter-to-quarter, year-to-year.

This is particularly surprising given the unprecedented volumes of liquidity that have been pumped into economies through various initiatives, initially to support bond markets and, more recently, in an attempt to stimulate real economic activity via programs of quantitative easing.

However, rather than boost business and consumer confidence, and thereby household consumption and business investment, the effects have been fairly muted, especially on business investment.

Moreover, the very real initial concern that such loose monetary policies would simply fuel significant inflation, also hasn’t materialized. Indeed, there has been a very real risk of deflation, particularly in Japan and Europe, but also, at times, in the US and China.

Of particular interest has been the significant improvement in the US jobs market, with the unemployment rate falling from around double-digit levels to near 5 per cent – a figure that is considered near full employment – while overall growth has been modest, and inconsistent, without a rekindling of significant inflationary pressures, especially wages.

It seems there have been three main effects of this enormous boost to global liquidity – increased inequality, some “bubbles” in stock, bond and property markets, and increased debt.

With very low interest returns, investors have gone heavily into stock and property markets, pushing them to unsustainable levels.

For example, much of the recorded growth in corporate earnings that has underwritten the strength of stock markets, has been achieved by cost cutting, rather than growing the revenue line, which will only happen with a significant pick up in business investment.

Stock markets can therefore be expected to correct as governments seek to rein in some of this liquidity by raising interest rates.

One of the most worrying consequences of all this global liquidity has been the flood into emerging economies, and often into more speculative activities.  Despite this, these nations are now in their fifth year of declining growth, but have run up some $18 trillion in foreign currency denominated debts.

Some years ago, when then Federal Reserve Chairman Ben Bernanke simply foreshadowed an end to quantitative easing in the US, the stock markets and currencies of these emerging economies collapsed by between 10-20 per cent in just a few days.

There is a very real risk of a crisis in many of these emerging economies as the world moves to raise interest rates, probably led by the US Fed. The latter has begun to recognise this possibility in recent days, against the background of mounting uncertainty about Chinese growth, and has thereby delayed lifting rates, pushing this possibility into next year.

Overall, the main market concern stems from the recognition that policy authorities have no relevant historical experience on which to draw. They have never had to deal with such a reversal of policy.

Indeed, the GFC was due, in large measure, to the world being flooded with liquidity under the previous Fed Chairman, Alan Greenspan, who held interest rates down for too long, driving investors to chase yield worldwide, and investment banks to create a mountain of debt products – sub-prime loans, CDOs, credit default swaps, etc, all of which collapsed in the GFC.

So, ironically, especially to the non-economist, the global “solution” was even more liquidity.

If the authorities get it wrong, we could see another GFC, and probably a global recession. Many now expect that, at best, we will have a “growth recession” with global growth settling around 2 per cent, or less, further constraining our economy to little better.

This piece was also published by the Southern Highland News.