13/01/2015
Ignacio Muñoz-Alonso, Finance lecturer, IE Business School
The growth patterns of the global economy after the crisis begin to differ substantially from those we envisaged back in 2009 and which continued during the Great Recession. At that time, we witnessed a decoupling between the damaged developed economies and the thriving emerging economies led by the BRICs, as well as the asymmetric effects caused by a crisis of balance between providers and recipients of capital. At the core of the financial crisis lay an accumulation of unprecedented monetary reserves in the emerging countries as a result of rocketing exports triggered by three decades of continuous gains in productivity and increased exports of raw materials. The counterpart of this surplus were the huge trade deficits in some developed countries in the 2000s, financed by importing developing countries’ accumulated capital and implementing it through the creation of all kinds of financial assets with increasingly weak solvency bases .
The outcome of the crisis revealed that rapid changes in the relative productivity between countries and their resulting trade imbalances, along with an excessive facility to create and sell all kinds of financial assets to cover them, proved to be a lethal combination. A bomb that exploded when the holders of that debt perceived that such uncompetitive and indebted economies as the Western ones could not generate the future incomes necessary to ensure their repayment, as it actually began to happen between 2007 and 2008.
The developed world has already spent more than seven years trying to correct these imbalances and just when we're starting to see some results, at least in the US, it seems that the situation is now becoming unfavourable for the emerging countries. MA El-Erian[1] published a few days ago an article analysing the state of the global economy in 2015 describing it as a year of 'divergence' in terms of trends, policies and outcomes, and of 'multi-speed' in terms of diversity of growth rates according to geographic and political areas. He divides the world into four groups, starting with the United States, where we will see a consolidation of growth with job creation and wage recovery that will allow a retaking of the path to recovery and a modest correction of imbalances of the distribution of income.
A second group would be China, which will continue moving towards structural maturity reorienting its growth to more sustainable and less explosive models, while strengthening its internal markets, institutions and regulation, and while it continues to expand the scope of action of the private sector and the discipline of its financial markets.
The third group, led by Europe, will see how stagnation fuels social unrest in 2015, complicating policy decisions in each of the countries and within the EU. The combination of anaemic growth with deflationary forces and excessive debt will hinder investment and perhaps help spread the revisionist ideas of the doctrine of sovereign debt, upsetting and creating instability in financial markets. The uncertainty and instability will be reinforced by local episodes of European architecture questioning, adding volatility to markets, as will happen in the Greek case and perhaps in the UK, if some of the proposals made by the major parties for the upcoming elections in May permeate market sentiment.
The final group is comprised by those he calls 'wild cards', in other words, the unpredictable, a group of leading countries due to their interconnections and systemic relationships with the global economy, the most prominent members of which would be Russia and Brazil.
Russia begins 2015 with a deep recession brought by the collapse of the rouble and its revenues from oil exports, capital flight and shortages caused by the contraction of imports. Ukraine is obviously the cornerstone of a bad economic situation aggravated by falling exports and reduced reserves, which will force president Putin to choose between re-enlisting with the West, softening its approach to Ukraine, or else following the path of nationalism as a way to contain popular discontent, thereby aggravating the crisis in the country and deepening European malaise.
And finally there's Brazil. The dilemma faced by Rousseff is whether to join Mexico in anchoring a more stable continent, thus reformulating its macroeconomic policy and resisting a relapse into statism and intervention, or opt instead for the continuity of the policies which have generated such instability and dependence in the past two years and that have nearly cost her the re-election.
This divergent outlook depicts a scenario of discrepancies in monetary policy and tension in the exchange rates for 2015. While the United States has already retaken the path of monetary orthodoxy interrupting massive purchases of long-term assets and signalling the possibility of hiking interest rates as of the summer, Europe is still deciding what kind of asset purchasing program it should develop and how to continue to expand its central bank’s balance sheet. Several years behind the United States, it shows the asynchrony present in the interest rate cycles and recovery horizons.
The divergence in the main blocks' growth and monetary policies will trigger exchange-rate realignments, as has already happened since the summer between the dollar and other currencies. The change in its currency will likely generate internal political tensions in the United States, as not many economies seem willing to join the dollar on its upward journey.
The map of global differences may lead to tensions in exchange rates and we will possibly witness debates and proposals of measures and countermeasures designed to accommodate exchange rates to national interests.
But overall, right now the risks don't seem to come from international coordination problems, but from the pockets of local imbalances that we have seen. Europe will benefit from all the positive effects flowing from an expanding US economy, in the same way that its destiny is tied to what happens in Russia or to oil prices. But trusting our prosperity to what others do is not the answer if we do not move in our own reform agenda instead, which remains wide and varied, with many headings still pending. Otherwise we would be leaving our future at the mercy of circumstances beyond our control.