Nouriel Roubini
The International Monetary Fund and others have recently revised downward their forecasts for global growth – yet again. Little wonder: The world economy has few bright spots – and many that are dimming rapidly.
Among advanced economies, the United States has just experienced two quarters of growth averaging 1%. Further monetary easing has boosted a cyclical recovery in the eurozone, though potential growth in most countries remains well below 1%. In Japan, “Abenomics” is running out of steam, with the economy slowing since mid-2015 and now close to recession. In the United Kingdom, uncertainty surrounding the June referendum on continued European Union membership is leading firms to keep hiring and capital spending on hold. And other advanced economies – such as Canada, Australia, Norway – face headwinds from low commodity prices.
Things are not much better in most emerging economies. Among the five BRICS countries, two (Brazil and Russia) are in recession, one (South Africa) is barely growing, another (China) is experiencing a sharp structural slowdown, and India is doing well only because – in the words of its central bank governor, Raghuram Rajan – in the kingdom of the blind, the one-eyed man is king. Many other emerging markets have slowed since 2013 as well, owing to weak external conditions, economic fragility (stemming from loose monetary, fiscal, and credit policies in the good years), and, often, a move away from market-oriented reforms and toward variants of state capitalism.
Worse, potential growth has also fallen in both advanced and emerging economies. For starters, high levels of private and public debt are constraining spending – especially growth-enhancing capital spending, which fell (as a share of GDP) after the global financial crisis and has not recovered to pre-crisis levels. That falloff in investment implies slower productivity growth, while aging populations in developed countries – and now in an increasing number of emerging markets (for example, China, Russia, and Korea) – reduce the labor input in production.
The rise in income and wealth inequality exacerbates the global saving glut (which is the counterpart of the global investment slump). As income is redistributed from labor to capital, it flows from those who have a higher marginal propensity to spend (low- and middle-income households) to those who have a higher marginal propensity to save (high-income households and corporations).
Moreover, a protracted cyclical slump can lead to lower trend growth. Economists call this “hysteresis”: Long-term unemployment erodes workers’ skills and human capital; and, because innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth.
Finally, with so many factors dragging down potential growth, structural reforms are needed to boost potential growth. But such reforms are occurring at suboptimal rates in both advanced and emerging economies, because all of the costs and dislocations are frontloaded, while the benefits occur over the medium and long term. This gives opponents of reform a political advantage.
Meanwhile, actual growth remains below the diminished potential. A painful deleveraging process implies that private and public spending need to fall, and that savings must rise, to reduce high deficits and debts. This process started in the US after the housing bust, then spread to Europe, and is now ongoing in emerging markets that spent the last decade on a borrowing binge.
At the same time, the policy mix has not been ideal. With most advanced economies pivoting too quickly to fiscal retrenchment, the burden of reviving growth was placed almost entirely on unconventional monetary policies, which have diminishing returns (if not counter-productive effects).
Asymmetric adjustment between debtor and creditor economies has also undermined growth. The former, having overspent and under-saved, had to spend less and save more when markets forced them to do so, whereas the latter were not forced to spend more and save less. This exacerbated the global savings glut and global investment slump.
Finally, hysteresis further weakened actual growth. A cyclical slump reduced potential growth, and the reduction in potential growth prospects led to further cyclical weakness, as spending declines when expectations are revised downward.
There are no politically easy solutions to the global economy’s current quandary. Unsustainably high debt should be reduced in a rapid and orderly fashion, to avoid a long and protracted (often a decade or longer) deleveraging process. But orderly debt-reduction mechanisms are not available for sovereign countries and are politically difficult to implement within countries for households, firms, and financial institutions.
Likewise, structural and market-oriented reforms are necessary to boost potential growth. But, given the timing of costs and benefits, such measures are especially unpopular if an economy is already in a slump.
It will be no less difficult to leave behind unconventional monetary policies, as the US Federal Reserve recently suggested by signaling that it will normalize policy interest rates more slowly than expected. Meanwhile, fiscal policy – especially productive public investment that boosts both the demand and supply sides – remains hostage to high debts and misguided austerity, even in countries with the financial capacity to undertake a slower consolidation.
Thus, for the time being, we are likely to remain in what the IMF calls the “new mediocre,” Larry Summers calls “secular stagnation,” and the Chinese call the “new normal.” But make no mistake: There is nothing normal or healthy about economic performance that is increasing inequality and, in many countries, leading to a populist backlash – both on the right and the left – against trade, globalization, migration, technological innovation, and market-oriented policies.
