A global slump is coming and we don't know why.
Ed Conway The Times 19.10.19
I remember precisely where I was when it dawned on me that the 2008 financial crisis was the big one. It was a wood-panelled room in the British embassy in Washington, 11 years ago almost to the day. A senior official took a few financial journalists aside and told us that the global financial system was on the brink of collapse.
Now in hindsight, a phrase like that might sound rather appropriate but remember this was before RBS or Lloyds had been nationalised and the consensus was still that the global economy would shrug it all off pretty quickly. The International Monetary Fund, whose annual meetings we were attending, was forecasting global growth of 3 per cent — weak by its standards but nowhere near the 0.1 per cent contraction that eventually transpired. Don’t panic, they said in public. In private, that was precisely what they were doing.
Today the IMF is once again meeting in Washington and everyone is nervous about comparisons with 2008. They point out that banks have more capital to support their balance sheets and that the financial system is more resilient. Yet the noises emerging from the global engine room are rather worrying. This week the fund slashed its world economic growth forecasts for the fifth successive time. It calls this a “synchronised slowdown” rather than a recession but the global growth forecast for this year is, guess what, 3 per cent — identical to that in 2008.
Some, the IMF included, would like to blame the downgrade on “policy uncertainty”, which is one of those economics euphemisms better translated as “we don’t really know”. They namecheck Donald Trump’s trade wars with China, changing regulatory standards for carmakers and Brexit as the factors holding back growth. Yet none of these explains the scale and breadth of the slowdown.
Indeed, rather than “policy uncertainty” it might be more appropriate to talk about “policy failure”. For not only are policymakers flummoxed about what’s going wrong; even if they did know it is not clear they could actually do anything about it. Central bankers have pumped trillions of dollars into the global financial system yet inflation remains below target in most of the developed world. The rules and models that economists have relied on for decades seem to be failing. With interest rates still stuck near zero we no longer have the ammunition we once did to confront any recession. To top it all off, China and the rest of the emerging and developing world are slowing even more markedly than the West.
The engines that powered the world for the past decade are faltering. The odd thing is that this has garnered so little publicity, though given that there is so much else going on to distract us perhaps that’s no surprise. When the IMF published its forecasts this week one popular interpretation in the British press was that it was a fillip for the UK, which will grow faster this year and next than France or Germany. But only someone utterly obsessed with Brexit could interpret this as good news. It is not. Everyone is slowing but some more than others.
These days I spend much of my time travelling the country talking to businesses about Brexit. Make no mistake, some of them are perturbed by all the risks you’re perfectly familiar with. But in recent months the main thing worrying importers and shipping merchants is not Brexit but the fact that their warehouses are no longer filling up with goods from overseas. The ships coming into port are not so heavily laden, air cargo holds are increasingly empty. Global trade is grinding to a halt.
Again, the conventional wisdom is that this is down to the US-China trade war, but while that has affected the nature of some trade routes, forcing China to start importing its soybean from elsewhere, it does not explain why trade is falling globally.
So what is going on? Well, one possibility is that China’s almighty debt bubble is finally deflating, or even imploding, but don’t expect Beijing to let on about it for some time. Another is that the dollar’s strength in recent years has strangled many of the traders who rely on dollar-based finance to support the movement of goods along their supply chains, as a fascinating working paper from the Bank for International Settlements suggested this week.
The scariest explanation is that in trying to solve the last financial crisis we fuelled a deeper malaise in global economics. Our central banks printed money and governments cut taxes but rather than using this money to invest, households and businesses frittered it away on consumption and share buyback schemes respectively. These days debt levels are so high and interest rates so low that any attempt to stimulate activity is simply pushing on a string.
Jan Vlieghe, one of the Bank of England’s most intelligent policymakers, has a thesis: if you want to get your head round the oddness of the economic world you need to contemplate the three Ds: high debt levels, which make everyone especially sensitive to higher interest rates; the demographics of an ageing population with people saving more and working less; and distribution, in short the fact that much income and wealth goes to the richest, who tend on average to spend less. Put these together and you have a world where interest rates may have to stay low not just temporarily but for the foreseeable future.
The good news is that none of this amounts to a new financial crisis of the kind we saw in 2008. The bad news is that economics as we knew it seems to be broken. There’s no guessing how or when we can put it back together again.
Ed Conway is economics editor of Sky News
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