Over the past two years, the global economy is growing, swaying in between the periods of acceleration and deceleration of growth. In particular, twice during this period, U.S. and global stock markets fell by about 10%. That this is a new model of growth, or still convulsive process of restoration of the economy over time stabiliziruemost?
The first case occurred in August-September of 2015, when many observers feared a hard landing for the Chinese economy. The second episode in January-February 2016 – has also been caused by concerns about China. However, investors were greatly disturbed also due to the possible slowing economic growth in the United States, the collapse in oil prices and commodities, a rapid increase in interest rates by the Federal reserve, and also because of unconventional monetary policy in Europe and Japan, which was introduced a negative interest rate.
Each of these cases, the inhibition lasted for about two months, after which the process of correction in the stock markets unfolded in reverse. The fears of investors did not materialize, and Central banks began to further soften its monetary policy or, as in the case of the Federal reserve, suspended the process of raising rates.
It is possible that we continue to live in the period that the international monetary Fund called the new stagnation, and the Chinese – the new normal. This period of low potential growth
A third case could be called the period after the referendum on Brexit in the UK in June 2016. But this episode was shorter, and it has not led to a global slowdown because of the small size of the British economy, and also because measures to mitigate the monetary policy conducted at that time. Moreover, a few months before the election, Donald trump President of the United States in November last year, the world economy has actually entered a new period of growth, despite maintaining a low level of potential GDP growth in developed and developing countries.
It is possible that we continue to live in the period that the international monetary Fund calls a “new stagnation”, and the Chinese – the “new normal”. This period of low potential growth. However, in the United States, Europe, Eurozone, Japan and key developing countries, we see economic activity beginning to gain momentum.
In China, growth has stabilized thanks to new incentives. In developing countries, particularly in India, Asia and even in Russia and Brazil, which experienced a recession in the years 2014-2016, things got better. In General, even before the results of the presidential elections in the United States stimulated the markets to start a “trade under the sign of trump”, the beginning of a new phase in the moderate expansion of the world economy was marked by “relational trade”.
Fresh economic statistics of the countries of the world shows that now the growth rate can accelerate. However, we cannot exclude the possibility that the current expansion of the global economy will end its regular slow (or even stop) if materialized a number of concomitant increased risks.
For example, it is obvious that the markets are overly optimistic about trump. The US President will not implement any radical measures to stimulate growth, which he proposed during the election campaign. And any political decisions that he can spend, will have only limited effect. Contrary to the allegations contained in the proposed administration trump the draft budget, there is little chance that the pace of economic growth in the US will accelerate from 2% to 3% per year.
The markets have underestimated the risks associated with policy initiatives trump. For example, the US administration can still resort to protectionist measures that could spark a trade war; and it has introduced immigration restrictions, which is likely to lead to lower growth, since they reduce the supply on the labour market.
The global economy could destabilize a whole series of scenarios involving the United States
In addition, trump can continue to do corporatewide micromanagement, which can cause a failure in private sector decisions related to investment, employment, production, and pricing. His proposals in terms of budgetary policy creates excessive incentives for the economy, which is already close to full employment. All this may force the fed to again raise interest rates that will undermine economic recovery in the United States because of the rising cost of long-term debt and the strengthening of the dollar.
Moreover, trump has created so much uncertainty with the budget, the fed could make a mistake in their
solutions. If he doesn’t raise interest rates quickly enough, then inflation gets out of control. The fed will then quickly, after to raise rates, risking to provoke a recession. But there is another risk: too slow a rate hike can lead to inflating bubbles in asset markets and with all the danger (the frozen credit markets, soaring unemployment, falling consumption and so on) that would follow their inevitable contraction.
Current fed chair Janet Yellen is unlikely to make the same mistake. But next year, trump will have the opportunity to appoint five (or maybe six) new members to the Board of governors, which consists of seven people. If he makes a bad choice, the risk of serious political mistakes will increase significantly.
Markets also underestimate current geopolitical risks, many of which relate to controversial, risky foreign policy trump. The global economy could destabilize a whole series of scenarios involving the United States. A military confrontation between the US and North Korea now looks possible. As well as diplomatic or military conflict between the US and Iran, which will cause a shock in the market of supply of oil. Or it could be a trade war between the US and China, which as escalation to develop into a major geopolitical conflict.
However, trump is not the only risk. China has resorted to a new round of capital investment in the credit for the stabilization of the growth rate of the economy. This means that in the medium term China will have to deal with more toxic assets, debt, level of debts and overcapacity. Problems of growth and stability of the economy will be in the spotlight of the Congress of the Communist party of China, which will be held this year, so the debate about how best to rebalance the economy and carry out structural reforms, will be on the second plan. However, if China will not do structural reforms and begins to limit the explosive growth of debt by next year, then again there will be the risk of a hard landing.
The EU and the Eurozone are still in the economic quagmire
As with other regions, the results of the recent elections in the Netherlands and France (and favourable expectations about the German elections in September) have reduced the threat of coming to power of the populists in Europe. However, the EU and the Eurozone still in economic quagmire. The markets fear that the theme of the disintegration of the Eurozone will once again become relevant if the five star Movement, advocating against the Euro, will come to power in Italy in the next election, which may be held this fall.
The following year, the confidence and sustainability of the global recovery will depend, primarily, on how the authorities will manage to avoid mistakes, is able to undermine it. At least we know exactly where these errors can be done with the greatest probability.
Nouriel Roubini, CEO, Roubini Macro Associates, Professor of Economics at the School of business to them. Stern new York University
Copyright: Project Syndicate, 2017