How the world economy shot itself in the foot

The US was ploughing through its economic recovery, with unemployment dropping past the targets even before year-end. Europe was initially looking healthy, with the UK and Germany acting as the locomotive, while France showed stronger signs of recovery. 

Japan was the champion of economic reform, with Abenomics reviving the long-stagnant economy into a vibrant one, to the point that some analysts were calling for Abenomics-style coordination of fiscal and monetary policy elsewhere in the world. 

China, on the other hand, had a rocky start, but most took the view that it would pick up pace soon with stimulus packages. 

Most of these, however, went awry. At this point, you may feel that things haven’t been any different. After all, the world economy has had its ups and downs many times in recent years: so many that doomsday economics has become the dominating doctrine in the media’s analysis. Nonetheless, I beg to differ.

The year 2014 was the first in seven years that didn’t have a single economic crisis. Don’t recall? Last year, we had the Cyprus debt crisis, sending shock waves through financial markets and bringing the spectre of a Greek debt crisis. In 2011-12, remnants of the Greek crisis and the possibility of a euro collapse dominated the markets and economic views as the Greek government bitterly passed austerity measures, sparking historic social unrest and wide speculation of its exit from the euro zone. 

Go back further, and we run into the series of banking defaults amid the sub-prime crisis, which would bring an end to names such as Lehman Brothers, Bear Stearns, and Northern Rock.

So this year, in spite of the Crimean geopolitical crisis, has been relatively calm by historical comparisons. Even the energy market has decidedly ignored the Ukrainian struggle towards the end of the year, with oil prices now lower than at the beginning of 2014 and around 30 per cent lower than this year’s peak. As you can see, it seems nothing financially important has blown up in the hands of major governments. Fingers crossed.

Still, the global economic outlook is faltering. Japan’s economic direction has been set back by two consecutive quarters of contractions in gross domestic product and the government has called for a snap election to redeem its legitimacy and vindicate Abenomics. The euro zone is also in trouble, with Germany struggling to keep its economy above water, as France continues to flip-flop between positive and negative growth rates. Both Japan and the euro zone have no other option but to pursue more aggressive quantitative easing to stimulate their economies at the time when the US has ended its own round. 

Why then has everything gone awry after the rosy outlook at the beginning of the year?

First, we must avoid the pessimism of the doomsday doctrine. Bear in mind that despite the seeming flat-lining of the world economy, it is by no mean in a crisis. Slow, yes. But panic? No.

Back to the main question. What happened this year, in fact, was a bit like shooting oneself in the foot. Take Japan for example. 

It stellar economic performance at the beginning of the year as the result of a series of massive fiscal and monetary stimuli was cut short by the deliberate decision to raise the consumption tax, from 5 to 8 per cent, in April. To be fair to Prime Minister Shinzo Abe, Japan is deeply in need of fiscal reform to slow down its ballooning public debt that stands at more than 2.5 times its GDP, and the 3-percentage-point rise in the value-added tax didn’t seem at all that painful to begin with. Unfortunately, it was. And the policy-makers completely underestimated its adverse impact. Hence the snap election.

The euro zone isn’t much different, it also shot itself in the foot. With leaders of the 18-nation bloc still pondering over an almost Shakespearean question – to spend or not to spend, that is the question – their economies are struggling to create a lasting recovery momentum. The European Central Bank is trying hard to buy time for these leaders to reach an agreement, though it seems the more time it buys the more time the leaders need. However, the Europeans do not have the Japanese “snap election” alternative, which means that most likely they will have to muddle through again.

In China, the central bank lowered its interest rates last week amid a slowdown in its GDP growth rate to 7.3 per cent. Chinese stock markets, of course, responded with enthusiasm, closing the day 2 per cent higher both on the mainland and in Hong Kong. Despite the People’s Bank of China’s denial that the cut was growth-motivated, any economics student would understand that the move will inevitably transmit to the economy as a whole. But that is only marginal compared with what its government and central bank can do for the economy. At the moment, the government’s message is that it is “content with its economic performance”, indeed a Buddhist virtue at an unfortunate time. 

This leaves us with the US economy, which accounts for roughly 20 per cent of global GDP. Is it growing? Yes it is. All real-sector indicators still point in the same direction, albeit a paradoxical view of timid inflation rates. But can the US save the global economy? Probably not. Its growth rate will sit comfortably around 2.2 per cent, according to the Conference Board’s recent projection, so it can comfortably be the lead locomotive of the global economy. 

In other words, things did happen to major economies this year, killing the hopes for a year of strong economic recovery. So don’t blame it on the stumbling global recovery, blame it on those holding the guns in their hands and decided to aim for their own feet … an unnecessary pain.

 

Views expressed in this article are those of the author and not of TMB Bank or its executives. Dr Benjarong Suwankiri is head of TMB Analytics, the economic analysis unit at TMB Bank. He can be reached at [email protected].