Here are 10 things you should be closely watching in the global economy
Mohamed El-Erian
President @ Queens' College, Cambridge | Finance, Economics Expert
Roller-coaster views about global growth were important contributors to the first quarter's dramatic "V"-shaped stock market performance — from a scare early in the year that weakness in China and elsewhere could tip the US into recession to a more comforting assessment underpinned by friendly central banks and, in the case of the US, strong job creation.
Disappointing growth is also the common element behind numerous improbable developments that have become reality, be they negative central-bank policy rates in Europe and Japan, almost one-third of government debt globally trading at negative yields, or the influence of antiestablishment political movements on both sides of the Atlantic.
Given the economic/financial/political/social implications of this protracted period of low growth, here are the 10 things you need to know right now:
Global growth will remain modest and uneven
Overall, global growth in 2016 will remain modest and quite uneven, in both the advanced and the developing worlds.
The US will continue to outperform
US growth, while again falling short of potential, will continue to power the advanced economies as the domestic economy outperforms. While Japan will struggle to maintain a 1% annual expansion, Europe will face even uncertainty depending on how politicians deal with the region's refugee crisis, Greek-debt forgiveness, and potential British exit from the European Union.
Growth in emerging markets will continue to struggle
Growth in emerging economies will struggle to break free from what in 2015 constituted the lowest annual rate since the 2008-2009 global financial crisis. China is likely to soft-land its economy at 6 to 6.5% growth, from 6.9% last year, while Russia and, especially, Brazil will experience another year of painful contraction.
Inequality will remain an issue
The benefits of the growth that is produced by the global economy will continue to accrue to a rather narrow segment of society, making the well-off even better off and keeping inequality high on the political agendas of most political parties.
Central banks will extend their liquidity pedal
The policy response to elusive growth is unlikely to extend much beyond what is already an excessive and prolonged reliance on experimental central-bank policies. Within the central-banking community, look for the Bank of Japan, the European Central Bank, and the People's Bank of China to extend their liquidity pedal-to-the-metal approach, while the Fed will continue to gradually and cautiously ease its stimulus.
Be careful in assuming that low growth will persist
Having already persisted for so long, the temptation is to assume that this low growth equilibrium can continue well beyond 2016. Be careful in doing so.
The strains from this low growth environment are apparent
Already there are visible and mounting strains from both the direct influence of low growth (including the challenge to the well-functioning of economic governance), as well as from its indirect impact (such as attempts by households in Japan to gradually disengage from a financial system that offers them negative nominal bond yields and is increasingly challenged to provide attractive longer-term financial assurance solutions).
Global growth will tip one of two ways over the next 3 years
Within the next three years, global growth will tip in one of two possible ways as it becomes harder for the global economy to maintain low stable growth and as central banks become less effective in repressing financial volatility. Nothing is predestined, at least for now, as to what comes next. This unusual period of low growth ("the new normal") would either yield to damaging recessions and financial instability or transition to high inclusive growth that also delivers genuine financial stability.
Politics will decide which way global growth goes
What lies ahead is much less of an engineering issue and much more of a political question. Specifically, the timing and direction of the coming tip is a direct function of the policies that politicians decide to implement in the next few quarters — specifically, whether they can unleash growth through infrastructure investments, tax reform, and higher labor-market participation; better match the willingness and ability to spend; tackle pockets of excessive indebtedness; and improve global policy coordination.
We don't need a big boost for policy. A small one will do.
With so much corporate cash sitting on balance sheets, and with exciting innovations on the verge of going macro, the quest for inclusive global growth does not need for politicians to deliver a big policy bang. A small policy bang would suffice.
This post originally appeared on Business Insider.
Mohamed A. El-Erian is the former CEO/co-CIO of PIMCO. He is Chief Economic Advisor at Allianz and member of its International Executive Committee, Chair of President Obama’s Global Development Council and author of the NYT/WSJ bestseller “When Markets Collide.” His most recent book, “The Only Game in Town: Central Bank, Instability and Avoiding the Next Collapse,”is also a NYT bestseller and is available now.
Follow him on Twitter: @elerianm. And get all of his content on Facebook.
MIM Consultant
8 年Mohamed El-Erian, what weight do you put on the ECRI index and the strengthen implication that we are are the verge of a recession similar to 2000? My concern with a inventory driven recession concerns unwinding. Given the exposed positions with Central banks and the elasticity of currency swings there is not much available tools to engage without yet sacrificing the future even more. We are in an environment of promoting growth today by sacrificing productivity in the future. We need innovation and incentives to pull us out of this mess in an environment where leaders are concerned with punitive initiatives, isolationism, and initiatives that carry unintended consequences to stifle innovation and growth. If you were to predict a decline in GDP what range would you look at, or are we differing our medicine through stagflation?
Consultant finance and accts,
8 年It is very difficult to believe that politics will tackle the pockets of indebtedness rather far too excessive.The nationalised banks are heavily under the pressure of NPA which are likely to be written off.The government again bringing additional capital that too out of taxpayers money to the coffers of Banks in the name of capital inadequacy.Instead of showing a rosey picture it is better to understand as to in how much deep water the economy of the world is standing before it engulfed everybody.
Formerly with Clark Hill PLC
8 年Two statements stand out in your assessment: the need for investment in infrastructure and cash parked on corporate balance sheets (and much of that offshore). We have a unique opportunity to connect this need, this resource, and the ingenuity of our innovators in science, business, and tech sectors to make your progressive scenario a reality. Time to get to work!
Senior economic analyst/Federal Government of Canada
8 年Certainly the inequality in the benefits of global growth will remain an issue as it is not an issue that can be solved in few years to say the least. In fact it may not disappear at all. Therefore, I am not really sure if it is something that we need to be watching in the global economy.
Project Engineering Manager at Worley
8 年What is have to say is that you are right on the side of what politician decide and the other hand it is the oil price game.