Sunday, November 23, 2014

The Stall-Speed Syndrome

NEW HAVEN – Relapse is the rule in the post-crisis global economy. In the United States, Japan, and Europe, GDP growth faltered again in the first half of 2014. These setbacks are hardly a coincidence. Persistent sluggish growth throughout the developed world has left major economies unusually vulnerable to the inevitable bumps in the road.

Sure, there are excuses – there always are. A contraction in the US economy in the first quarter of the year was dismissed as weather-related. Japan’s plunge in the second quarter was blamed on a sales-tax hike. Europe’s stagnant growth in the second quarter has been explained away as an aberration reflecting the confluence of weather effects and sanctions imposed on Russia.

As tempting as it may be to attribute these developments to idiosyncratic factors, the latest slowdown in developed countries is not so easily dismissed. Lacking cyclical vigor in the aftermath of severe recessions, today’s economies are finding it especially difficult to shrug off the impact of shocks and break out of anemic growth trajectories.

Consider the US. Though annual GDP growth is estimated to have rebounded to 4% in the second quarter of 2014, following the 2.1% first-quarter contraction, that still leaves average growth in the first half of the year at a measly 1%.

The problem is even worse in Japan, where consumers brought forward expenditures in anticipation of the sales-tax hike. The 6.1% first-quarter growth surge to which this gave rise was more than offset by a 6.8% second-quarter contraction. The net result in the first half of this year – an average decline of 0.3% – is broadly in line with the 0.2% contraction now estimated for the fourth quarter of 2013. With the trajectory of real (inflation-adjusted) growth having moved into negative territory, on average, for three consecutive quarters, Japan may once again be reverting to recessionary form.

Europe’s fragile economy has similarly failed to recover strongly enough to ward off periodic growth setbacks. During the acute phase of the euro crisis, recession was concentrated in peripheral economies such as Greece, Portugal, and Spain. Now, however, the malaise has spread to the core economies of Germany and Italy, both of which contracted in the second quarter, and to France, which recorded zero growth.

As a result, annual growth in the 18-country eurozone slipped to just 0.4% in the first half of 2014. This poor performance can only exacerbate the European Central Bank’s deflationary concerns.

Collectively, the annual growth rate in the major developed economies averaged a little less than 0.7% in the first half of 2014. America’s paltry 1% growth led the way, while Japan and Europe, whose combined GDP is roughly equal to that of the US in purchasing-power-parity terms, recorded no better than a 0.3% increase. On balance, that is easily 1-1.5 percentage points below the developed world’s longer-term, or potential, growth trend – a worrisome outcome, to say the least, for employment, deflation risk, global trade, and export-dependent developing economies, such as China, which remain heavily reliant on external demand in developed countries.

But there is another problem with persistently subpar growth: It provides no cushion to shield economies from unexpected blows. That is especially true when growth falls below 1%, leaving a thin margin between expansion and contraction. Such sluggish performance is the economic equivalent of “stall speed” – the heightened vulnerability that aircrafts can encounter at low velocity. Under such circumstances, it does not take much to lead to an aborted takeoff, or worse.

The analogy is all too apt today. Shocks, whether traceable to weather, geopolitical disturbances, strikes, or natural disasters, are the rule, not the exception. When hit by them, vigorously growing economies have cushions to withstand the blows and the resilience to shrug them off. Economies limping along near stall speed do not. The odds of a recessionary relapse in an environment of unusually weak growth – very much the problem today – should not be minimized.

The big question is what should be done about it. The current approach, centered on unconventional monetary policy, is not the answer. Though monetary policy provided a powerful antidote to frozen credit markets in the depth of the global financial crisis, it has failed to spark classic cyclical recoveries.

That should be no surprise. The world’s major developed economies are not suffering from cyclical deficiencies in aggregate demand that are amenable to a monetary cure. As the Bank for International Settlements correctly points out, they are still struggling in the aftermath of wrenching balance-sheet recessions.

In the US, a lingering overhang of household debt implies that deleveraging and the rebuilding of savings continues to take precedence over discretionary consumption. In Japan, long-standing structural problems, such as aging, labor-market rigidities, and a generalized productivity malaise, can be addressed only through the so-called “third arrow” of Prime Minister Shinzo Abe’s reform agenda, which remains woefully incomplete. And Europe faces a desperate need to build pan-European institutions to ensure banking and fiscal union, and to address serious competitiveness problems in France and Italy.

Unfortunately, the more that central banks give the impression that that they are on the case, and the more that markets cheer them on, the less pressure there is on politically gridlocked governments to deploy fiscal policy and push through structural reforms. Moreover, the fixation on monetary accommodation leaves slow-growth, balance-sheet-constrained economies stuck at stall speed, increasing the risk of yet another global growth relapse. 

Myopic authorities need to take less guidance from frothy financial markets and focus more on the structural repair of a post-crisis world. This is a time for heroes, not cheerleaders.

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    1. CommentedNathan Weatherdon

      Printing money would help to avoid the temporary deflationary risks associated with the contraction following the 'buying forward" in Japan. Bond holders will make the case for the counterarguments, presumably with self interest serving as a strong guiding light.

      Contract workers will not be able to make major expenditures. "Efficiency" in a flexible economy will bring real costs and headaches for macro planners in Japan, imo.

    2. CommentedJonathan Lam

      Gamesmith94134: The Stall-Speed Syndrome

      It was the monetarism that began in the 90s’, macroeconomic did not co-ordinate with micro economic that cash flood cause the bloated market and inequality showed in the labor market balance from its disinflationary policy. In a way that caused a rift that in stock and equity market that consumption was limited to the employment.
      Perhaps, all the data provided by Mr. Stephen S. Roach reflected the inequality has a pull on the laborers and consumption that low interest rate is eating the savings alive. A present point, everyone is buying stock and equity with over-price that even the locals or consumers is not catch up with its utility and tax demanded. Throughout the disinflationary process that financing depressed consumer credit and many cut borrowing in fear of rising of unemployment.
      Now, even dollar is under the spell of beggar thy neighbor that dollar is unreasonable high with the restraints of the bond load and low interest rate.
      For better picture, look back when yen change it rate from 300 to 90 in a dollar. EU and US live inbound of 2% inflation; so is the equity return to 08’level is just a joke………

      Gamesmith94134: This Recovery is Different Sep. 4, 2012
      Daniel Gros gave a few good points on the insidious harm that the overwhelming usage of the macro-economic that growth have became the poison to financial world; it is because the suppression on the deflation on the capital goods like housing and bloated price on the commodity good would cut profitability and the slow growth on the wages on labor and the investment from the retired; they just wore down the micro-economics that supply and demand are no longer relevant to the present development. Perhaps, the continuation on the quantitative easing on the financial would definitely make the implosion from the sustainability or austerity, further on, the polarization of rich and poor would much severe. Perhaps, we are standing on the turning point on the long recession or Japanification till we reckon with the creation of the another currency warfare as well the global trade war that we are at the mercy of the creditor and how their sentiments turn against us just like Mr. Gros said.
      Nature does have it way, everything can be substituted and contested through competitions. No matter how we suppress inflation or deflation, at present, it was the implosion on the micro-economics that sustainability or affordability were ignored; they are displaced through the sequences of macro-economic measures with that broke the rule of remedial process to make the wealth sustainable and goods affordable for the polity among nations. Anymore of the growth policy in the coming six months would be disastrous for the global financial and jeopardize the recovery permanently-----global Japanification to all.
      May the Buddha bless you?

    3. CommentedProcyon Mukherjee

      The "structural repair", must begin with monetary policy itself, otherwise the deluge of liquidity has moved to amassing disproportionate share of liquid assets that the world had never seen before. As the S&P 500 silently crossed the threshold of 2000, on the back of the earnings per share surge, which did not come from growth in revenues but by the unabated flow of funds into share buy-backs; this is not economic value add to which the money flow is directed.

    4. CommentedAlessandro Daliana

      Very interesting take one the situation. Thanks for macro-economic policy doesn't seem to be doing it for any of the developed nations.

      In my view, economic growth is stagnant because the lion's share of GDP is consumer spending and, let's face it, consumer needs are satisfied. To be more precise, consumers buy products and services that reduce the uncertainties of living. GDP is stagnating because the capitalist system worked and most people's uncertainties are satisfied. If not satisfied then they don't think they can do any better than what they've got today.

      On the other hand, as Mr. Roach implies, people are worried about tomorrow. Consequently, they are trying to (re)build a nest egg for their retirement.

      The highest level of uncertainty is not for today but for tomorrow.

    5. CommentedJoshua Ioji Konov

      Right conclusions about the condition of the most developed economies, however wrong suggestions of how things will improve... the trickle-down conception has not been working in the 21 century and therefore facelifting only would not make it better: the whole conception of so called "orthodox" economics is becoming more-like fictional than creating enough business activities to make these economies fiscally sound..., neither the supply driven economy could prompt enough demand under the conditions of the ongoing globalization and rising productivity. The large corporations in a "shady" business environment of deregulation would not bring long term global development, it is about the small and medium size businesses that could do it, however if the rule of law in business is "shady" these businesses are lacking market security becoming non-lendable or high interest lendable, indeed. Thus, the structural changes should go into enhancing the business laws and liability, insurance, bonding, etc instead of relying on the "old" theories economics.