Economics: Fresh notes of optimism play to a gloomy chorus
Low inflation has been around for so long most analysts now assume it is permanent
Olivier Blanchard, former chief economist at the IMF, is among the economists who disagree with a lot of recent commentary, and say that “we share a conviction that public discussion of the global economic outlook has run off the rails”. Photograph: Ibrahim Usta/AP Photo
Just about everyone has bought into the idea that we live in a low-growth world. The European Central Bank’s economic worries have prompted more cuts in interest rates and an extension of quantitative easing (money printing). At the start of the year stock markets around the world fell, sometimes heavily, signalling that low growth could turn into recession. With the exception of one or two countries – especially Ireland – the growth numbers are, indeed, low.
The International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), Bank for International Settlements (BIS) and G20 finance ministers are falling over themselves to warn about risks. Analysts and commentators have joined in the chorus, cutting their already meagre growth forecasts. Their reasoning looks impeccable: recoveries are now long in the tooth – history teaches us that cycles cycle. In addition there are the lingering effects of the financial crisis, high debt levels, poor demographics and the fact that governments everywhere refuse to boost economic activity with higher spending.
Future generations will look back with wonder over our refusal to take money from bond investors – who are in many cases willing to pay us for the privilege. Around the world there are now trillions worth of bonds with negative yields: governments get paid to borrow. All because growth prospects are so poor.
Can this gloomy narrative be challenged? It is an overwhelming consensus – that doesn’t mean it is automatically wrong, but there are plenty of reasons to be wary of conventional economic wisdom. Having been condemned for failing to forecast the last recession no analyst wants to miss the next one.
More substantively, researchers at Washington’s Petersen Institute for International Economics this week felt moved to offer an alternative view. The economists, including Olivier Blanchard, recently chief economist at the IMF, disagree with a lot of recent commentary, and say “we share a conviction that public discussion of the global economic outlook has run off the rails”.
There are so many odd things going on that we need to be more careful than usual with our crystal balls. Economists, with a few honourable exceptions, forecast that if central banks were to print trillions of dollars, yen and euros, as they have done, inflation would be the result. That inflation is only notable by its absence is one reason to reflect on how little we really know about how things will evolve. We used to think there was no chance of interest rates falling below zero: the ECB’s move (along with Scandinavian and Japanese interest rates) into negative territory has contradicted a lot of text books. Banks, not just governments, are now going to be paid to borrow from the ECB. Think about that: we’ve come a long way from Trichet’s threats to stop (expensive) lending to the Irish banks.
Low inflation has been around for so long that most analysts now assume it is permanent. By contrast, it is possible that monetary stimulus is just taking a long time to work. Nobody expects higher economic growth or inflation. Nobody expected the financial crisis either.
BoostForecasters used to say cheaper oil gives a boost to the world economy. The fact that growth didn’t accelerate after oil fell to $30 a barrel has led some to change their minds; falling oil prices are now seen as a big negative. As with lower rates, maybe it’s just that things take longer to work.
An Ikea executive recently coined the term “peak stuff”: consumption of physical goods has reached a plateau and spending growth will now be concentrated on services. Diane Coyle of Manchester University last week drew attention to data that shows a long-term decline in the amount of physical stuff involved in UK economic activity: down from 15 tonnes per person in 2000 to 10 tonnes now. The UK gets £3 of GDP for each kilo of physical inputs, up from £1.87 in 2000. Ikea’s peak stuff may have already arrived.
Our measurement systems were designed to “weigh” the output of an economy. It is tough to guess the weight of a digital music file or the true value of Wikipedia or a Facebook post. Maybe the real value of our economies is higher than we think.
Another forecast that isn’t working out, not yet anyway, is that robots are taking over our jobs. In the US, unemployment is now at 4.9 per cent. The US jobs picture is extremely strong: previously “discouraged workers” are coming back into the labour force. There are hints that US inflation is edging up.
We live in an era of economic pessimism. That’s not surprising given the financial crisis. While commentators were quick to celebrate the earlier stock market swoon, not nearly the same attention has been paid to the recent bounce. It is fascinating to observe the likes of Brazilian equities soar (even when European stocks were having second thoughts about the ECB’s latest bazooka).
The Dublin rush hour now starts a good 15 minutes earlier than it did at the peak of the Celtic Tiger and seats on the Dart have, like inflation, disappeared. Beware the consensus, things might actually turn out okay. The rest of world probably won’t get to share in Ireland’s latest boom but recession risk is equally low. Unless we talk ourselves into one.