Last year, virtually all the very “serious people” threw in the towel on global growth and trade.
It’s been apparent for quite some time (like say, a couple of years) that the slump in trade growth has likely become structural and endemic as opposed to transient and cyclical in the post crisis world.
As WSJ noted last autumn, 2015 marked the third year in a row that the rate of growth in global trade trailed the already sluggish expansion of global GDP. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should,” WTO chief economist Robert Koopman remarked.
Part of the shift is due to China’s transition from an investment-led, smokestack economy to a consumption and services led model and the rest is attributable to the fact that things simply “ain’t what they used to be” in terms of economic fundamentals.
All of this led the OECD to cut its forecast for global growth last September to 3% for 2015. “Global growth prospects have weakened slightly and the outlook is clouded by important uncertainties,” the organization said, adding that “emerging economies have vulnerabilities that could be exposed by rising US interest rates and/or a sharper-than-expected slowdown in China, giving rise to financial and economic turbulence that could also exert a significant drag on advanced economies.”
Make no mistake, 2016 has certainly demonstrated that EM is vulnerable to liftoff and that a Chinese hard landing (and the attendant devaluation of the yuan) has indeed precipitated “financial and economic turbulence” with the potential to spill over into advanced economies.
Given that, we weren’t surprised to see the OECD cut their 2016 growth forecast to 3% from 3.3% in November. “Global economies have flatlined,” read a tweet from the OECD’s official Twitter. “Urgent policy response needed.”
Global #economies have flat-lined, urgent policy response needed: #OECD’s @CLMann https://t.co/wywZhgVtRQ #growth pic.twitter.com/aMRWJMI7zs
— OECD (@OECD) February 18, 2016
By “urgent policy response,” the OECD is attempting to encourage G-20 finance ministers to come to some kind of consensus in China next week. In other words, they're hoping for a so-called "Shanghai Accord", a reference to the 1985 Plaza Accord which, as BofA reminds us, "agreed to weaken the USD to help America improve its huge trade deficit and spur economic growth out of the doldrums of the early-1980s."
Now that monetary policy has failed miserably when it comes to reviving global demand and trade, the world is looking to fiscal policy for answers. It's right out of the Ben Bernanke playbook: rate cuts and QE not working? Blame lawmakers.
"Fiscal policy is now contractionary in many major economies. Structural reform momentum has slowed," the OECD warns. "All three levers must be deployed more actively to create stronger and sustained growth."
It's not even clear what that means. "Structural reform" presumably refers to fiscal consolidation but fiscal retrenchment isn't at all compatible with fiscal stimulus, so how can "all three levers" be simultaneously "deployed"? Indeed, that's the challenge facing the likes of Brazil and Greece.
Whatever the case, don't expect policymakers to come to some kind of grand consensus in Shanghai. "It’s probably too early to expect a Shanghai Accord," BofA's Michael Hartnett said, late last month. "[The risk in] 2016 is that markets need to panic before there's a coordinated policy response."
Cue the panic.
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//www.slideshare.net/slideshow/embed_code/key/lF8qbbyKUX5brC OECD Global Interim Economic Outlook February 2016 presentation from OECD - OCDE