Restarting the engine of global economic growth

The global economy is like a stalled car, with governments and policymakers around the world trying everything in their power to get it moving again. The current strategy of choice, monetary stimulus, is akin to filling the tank with more petrol. The car may restart but could still falter again, and if the root cause has not really been fixed (e.g. the fuel line is broken), all you get is an increasingly more combustible mix of excess leverage and misallocated capital, waiting to be set off by the next crisis.

Since the 2008 global financial crisis, central bankers have been slashing interest rates and magically conjuring money out of thin air, otherwise known as quantitative easing, in the hopes of returning their respective economies to real growth, job creation and positive inflation.

Thanks to this monetary stimulus, the balance sheets of the world’s four largest central banks (United States, European Union, Japan and China) have more than doubled since September 2008, from US$7 trillion (S$9.47 trillion) to US$17 trillion today. Total bank credit worldwide has risen 50 per cent from US$60 trillion to US$90 trillion over the same period. This surge in global liquidity is almost unheard of in recent economic history.

While there is some success on the jobs front — most notably, US unemployment is back at pre-crisis levels although the participation rate is near a 40-year low — economic growth and positive inflation have proven elusive across G7 countries, including the EU.

The world economy is likely to face yet another wave of fresh liquidity in the coming months, with the Reserve Bank of Australia and the Bank of England cutting their benchmark rates to respective record lows in recent weeks. Meanwhile, the European Central Bank and the Bank of Japan are already on the unconventional path of negative interest rates and widely expected to announce further stimulus at their upcoming policy meetings.

By lowering interest rates or directly buying government bonds, central banks hope to nudge large institutional investors into progressively higher-risk investments. Higher asset prices should make it cheaper for corporates to raise debt and equity financing, which should in turn support capital spending and job creation.

But with all this money already sloshing around in the system with little to show except skyrocketing asset prices and yawning wealth gaps, to keep doing the same thing over and over again while expecting different results is the essence of futility or, some might say, insanity.

The obvious alternative option — government pump-priming — is politically unpalatable when governments the world over are already struggling to reduce their debt-to-GDP (gross domestic product) ratios. It would take a brave, or foolish, politician to run a large fiscal stimulus/deficit spending programme and few countries have the necessary reserves or the mandate to push such legislation through without economic or political consequences.

Indeed, sticking with the stalled car analogy, I would also caution that fiscal stimulus is akin to getting out and giving it a push: A temporary measure that gets the car going again, but is limited in its sustainability and efficacy — and certainly of no use when the underlying problem is something more fundamental.

While the deployment of extraordinary stimulus on both the monetary and fiscal fronts have prevented the world from falling into a second Great Depression, both appear to have hit their limits in terms of their ability to bring us back to pre-crisis levels of growth.

The fundamental problem is that the twin engines of economic expansion since the end of World War II — population and productivity growth — have stopped working, and no amount of extra fuel or pushing will kick-start the car in the short term.

Our societies are ageing rapidly, with major cities (even in developing countries such as China and India) reporting fertility rates below the replacement level of 2.1, at least for the past decade. Meanwhile, productivity gains from technological innovation are starting to wane as computers, smartphones and Internet access have become ubiquitous around the world.

Policymakers would do well to pay less attention to their quarterly GDP reports and monthly PMI (purchasing managers index, which measures the health of the manufacturing sector), and resist the urge to tweak their economies to fit some apparent trend or what we may deem “normal” GDP growth (e.g. the US grew by a fairly consistent 3 per cent per annum in the four decades before 2007).

Furthermore, as the psychologist Abraham Maslow once observed: “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.” By doubling down on stimulus despite poor results, policymakers run the risk of realising at some point that they have been hammering away at something other than a nail.

Instead, perhaps we should all just come to terms with the inherent cyclicality and unpredictability of economic growth, embrace the occasional recession for its cathartic qualities, and repair the engines of growth. This can be done by focusing resources on productivity-related reforms, providing the right conditions for people to have more children and investing heavily in technologies that might revolutionise the world the way the Internet did 20 years ago.

These long-term investments will take years, or even decades, to have an effect. However, if there is one thing I have learnt from having spoken to the most (and the least) successful fund managers in the industry over the years, it is that the best performance comes from investing prudently, ignoring market volatility and being patient. Maybe we have something to learn from the bankers after all.

ABOUT THE AUTHOR:

Charles Tan Meah Yang was previously Director of Investment Companies Research at Cantor Fitzgerald and is currently co-founder of property startup 31-East.com