Global economy data remains poor amidst some optimism
On Tuesday leading indicators published by the Organisation for Economic Cooperation and Development (OECD) showed that based on January data, economic activity continued to point to continuing slowdowns in the US, the UK, Canada and Russia, with additional slowdowns expected in Germany and Brazil. Also Tuesday the International Monetary Fund warned that the world faces a growing “risk of economic derailment” and needs immediate action to boost demand. Earlier on Tuesday in Beijing data revealed the worst monthly collapse in Chinese exports since 2009.
However, economists, led by Adam Posen, a former member of the Bank of England Monetary Policy Committee, and Olivier Blanchard, former IMF chief economist and professor of economics at the Massachusetts Institute of Technology (MIT), at a Washington DC think-tank, in a briefing set out what is known, both about macroeconomic dynamics and policy capabilities, in a context where distrust of both mainstream economic analysis and policymakers' credibility has become excessive. The economists say that global economic fundamentals today are not so grim, though there is room for improvement in key areas including China, the United States, European banks, Brazil and Latin America, oil markets, global trade, and monetary options.
The OECD’s composite leading indicator for 33 of the organisation's 34 mainly developed country members + 6 major non-member economies, fell to 99.6 from 99.7 in December. A reading below 100.0 points to growth that is slower than normal.
In dollar terms China’s exports dropped 25.4% in February from a year earlier, the worst one-month plunge since early 2009 and down from an 11.2% decline in January. Imports fell 13.8%, compared with an 18.8% fall in January.
David Lipton, IMF first deputy managing director, told a conference of business economists in Washington DC Tuesday:
In many parts of Europe, for instance, sovereign and private sector balance sheets remain highly leveraged and banks’ non-performing loans high. In the US, ageing-related spending pressures and unfulfilled infrastructure needs diminish economic prospects. And in Japan, deflation is putting the recovery at risk.
At the same time, we are witnessing an emergence of new risks. The global economic slowdown is hurting bank balance sheets and financing conditions have tightened considerably. In emerging markets, excess capacity is being unwound through sharp declines in capital spending, while rising private debt, often denominated in foreign currency, is increasing risks to banks and sovereign balance sheets.
Lipton cited a decline in equity prices in 2016 so far this year has averaged over 6%, implying a loss of global market capitalization of over US$ 6 trillion (or 8.5% of global GDP). In 2015 emerging markets experienced about $200bn in net capital outflows, compared with $125bn in net capital inflows in 2014. He also referred to trade flows being dragged down by weak export and import growth in large emerging markets such as China, as well as Russia and Brazil, which have been under considerable stress.
Economists at the Peterson Institute for International Economics in Washington DC, in a policy briefing called for a “reality check” and said that irrational pessimism about the global economic outlook could lead to a “needless, preventable recession.”
The following are extracts from the briefing:
Greater confidence in the world economy’s resilience and near-term prospects is justified. Market fears about the ability of policy to stabilize growth and promote inflation, if understandable, are exaggerated or in some cases unfounded. All the more reason then not to allow ourselves to be distracted by a financial market tail wagging the macroeconomic dog. At a fundamental level, most of the major economies, starting with China and the United States, are growing more sustainably now than a decade ago, at their slower rates. That growth is not built on rising private or public leverage, with the notable exception of China — and even in China some restructuring is under way with ample savings to cushion the process. Even where the situation is not so rosy, many in the markets seem to be confusing strains and suboptimal situations with acute instability, not just for Italian banks and for Brazilian budgets but also for Latin America more generally or for trends in global trade. A more normal muddling through with poor but stable conditions is a far better bet. And where some in the markets moving prices fear that normal economic laws have been reversed — that monetary policy is ineffective or that low oil prices are on net harmful — they are likely to be proven clearly wrong, as they were previously on inflation and commodity prices.
Gains in nonfarm payroll [US] employment have averaged over 230,000 per month over the past three months and 215,000 per month over the past six months. Only about 100,000 per month are needed to stabilize the unemployment rate. By that standard, the recent pace of hiring has been solid, contributing to the fall in the unemployment rate from 5.3% six months ago to 4.9% in January — extending the long decline that began in late 2009. In addition, job openings as a share of employment now exceed prerecession levels, and rising quit rates suggest that workers are feeling increasingly comfortable leaving a job to pursue employment elsewhere.
Standard wisdom and a lot of previous empirical evidence suggest that for net oil importers cheaper oil increases real income and consumption, increases profits and investment, and lowers production costs. (Despite the sharp increase in shale oil production, the United States still imports about 30% of its consumption of petroleum.) Empirical evidence from the two large price increases in the 1970s shows that they were extremely costly, leading to both higher inflation and lower output. Evidence from the precrisis increases of the 2000s shows lower but still significant costs, both in terms of inflation and output.