London: The global economy seemed to be on the mend when the International Monetary Fund met for its spring meeting in Washington 10 years ago. Alan Greenspan had cut official interest rates in the US to 1 percent after the collapse of the dotcom boom and the world’s biggest economy had responded to the treatment. Gordon Brown was Britain’s chancellor of the exchequer (finance minister) and the country was in its 12th year of uninterrupted growth.
Companies in the west were flocking to China now that it was part of the World Trade Organisation. The talk was of offshoring, just-in-time global supply chains and integrated capital markets. The expectation was that the good times would last for ever. No serious thought was given to the notion that total system failure was just around the corner. Faith in the self-correcting properties of open markets was absolute. When the crash duly came, a self-flagellating IMF confessed that it had been guilty of groupthink. Downside risks to the forecasts in its half-yearly World Economic Outlook (WEO) are now exhaustively catalogued.
The world of 2014 is not dissimilar to that of 2004. The boost provided by cheap money has got the global economy moving. Inflation as measured by the cost of goods and services is low but asset prices are starting to hum. Financial markets have got their mojo back. Deals are being done, big bonuses paid. Some analysts believe that the Great Moderation — the period of low inflation and continual expansion — has returned after the hiatus caused by the crash. The optimists could be right. Recessions tend to be the exception rather than the norm and countries eventually revert to a trend rate of growth.
Imagine, therefore, that in five years’ time the IMF is doing its postmortem on another period of global turbulence. What will it say were the warning signs missed during 2014? Here are five to be going on with.
The first will doubtless feature in the WEO due to be published on Tuesday: the global economy’s dependency on exceptionally low interest rates. Since peaking in the 1970s, the trough in interest rates has been lower in each subsequent cycle and they are now barely above zero. The second threat is a bond market crash as the world’s central banks try to return monetary policy to a more normal setting. Central banks are adopting a cautious approach to this process, with the Federal Reserve gradually reducing the amount of bonds it buys under the quantitative easing programme and the Bank of England using forward guidance to reassure borrowers that any increase in official interest rates will be modest and gradual.
A real black-swan event contains the element of surprise, so it is worth looking around to see if there is a bubble out there that everybody is missing, something so obvious it is staring us in the face. How about fracking? Yet the Oil & Gas Journal reported last month that 15 major companies have written off $35bn in investment since the boom began. Getting oil and gas out of the ground is proving costlier and less profitable than expected. So the third threat is that fracking proves to be the new sub-prime.
Finally, there are two slow-burn problems that the world ignores at its peril. In an interview last week, Jim Yong Kim, the president of the World Bank, warned of the risk of resource conflicts within the next five to 10 years unless the international community gets serious about dealing with global warming. The catalogue of extreme weather events — from floods in the UK to droughts in Australia — is growing. The inaction of policy makers on climate change is the same as Greenspan’s to asset-price bubbles: deal with the problem if it arises. We all know how that ended.
The Guardian
