DAVID Cameron has warned of an unstable global economy. He says red lights are flashing on the dashboard. They are, but only in some parts of the world. Elsewhere, recovery looks firmly entrenched.
Hot on the heels of US Treasury secretary Jack Lew’s comments about a “lost decade” in Europe, the Prime Minister’s remarks show how vulnerable we remain to setbacks six years on from the financial crisis. Both comments were veiled threats to leaders in Europe and Japan to address productivity and low growth expectations through structural reforms. The message was clear: monetary policy can’t be expected to do all the heavy lifting.
Japan’s unexpected lapse into a fourth recession since 2008 and Europe’s stagnation are the developed world’s black spots. Meanwhile, Russia, Brazil and South Africa show that emerging markets are not immune.
A few years ago, we were talking about a two-speed world – developing markets driving growth, while the West trundled along in the slow lane. It’s all a bit more complicated today.
Diverging growth rates are in part a reflection of the recent plunge in the oil price. This is fuelling a positive disinflationary shock for energy importers, while creating a significant headwind for exporters. Cheaper oil is great news in places like the US, where there is an immediate pass-through to consumers on the forecourts. Lower input costs for companies and more disposable income for households should keep the US recovery on track, while lower inflation provides the Fed with the cover to keep interest rates lower for longer. The US stock market is close to an all-time high.
For oil exporters, on the other hand, the falling cost of crude is a disaster. Saudi Arabia’s role is pivotal because it is better placed than its Opec peers to weather a period of lower revenues. As President Putin remarked in Brisbane over the weekend, it is potentially catastrophic for Russia.
The ongoing problems in the global economy illustrate the limitations of the extraordinary stimulus measures of recent years. In both the developed and emerging worlds, the need for economic reforms has been laid bare by sluggish growth.
In Japan, the third arrow of Abenomics, reform, is proving a harder nut to crack than the first two, monetary and fiscal stimulus. It is arguable, too, that Europe’s retreat from the abyss of the sovereign debt crisis has also allowed it to step back from essential improvements to the region’s competitiveness.
Reform is a key theme in the emerging world too. The best prospects are clearly being enjoyed by those countries which have started to implement reforms – India, China and to a lesser degree Indonesia. Where reform coincides with a net benefit from cheaper oil, the outlook is bright. India’s growth could overtake that of China within a couple of years. By contrast, the worst-placed countries are those which failed to fix the roof while the sun shone during the commodity export boom.
Risks abound in today’s uncertain world. A hard landing in China and an escalation of violence in Ukraine are the most obvious. But despite Cameron’s warning, there are winners as well as losers from today’s economic instability.