In a recent report Citigroup Inc. (NYSE:C) published research on Post-Crisis World Economy which draws on some of their past research to conduct a rapid-fire tour of some key issues facing the global economy. They are particularly interested in assessing the extent of recovery from the financial crisis and make no pretense of providing a comprehensive assessment of global developments or of the economic outlook. Rather, Citi focus on some important forces that they believe are shaping global performance, and report offer some thoughts as to how these forces are likely to evolve in the years ahead.
1. Stagnant Global Trade and Production
Citigroup Inc. (NYSE:C) highlights (figure below) the recent disappointing performance of global trade. World export volumes plunged during the financial crisis but then rebounded briskly through 2010. Thereafter, however, the recovery in world trade has lost steam. Exports decelerated through 2011, and over the past year or so have generally moved sideways. This assessment is reinforced by the performance of the global manufacturing PMI, which has recently cycled around its 50 breakpoint, suggesting stagnation in the global manufacturing sector.
The growth of global industrial production (the right panel) has followed a broadly similar path to that of real exports, falling off sharply over the past few years, to levels typically seen only during the early stages of downturns. This weakness has been particularly seen in the advanced economies, where aggregate industrial output slipped into negative territory in mid-2012. Performance in the emerging markets has been stronger but still somewhat soft relative to past performance.
2. Is the Global Economy Approaching Stall Speed?
Consistent with the previous topic, real GDP growth in advanced economies seems particularly weak from a historical perspective. Specifically, average growth in the advanced economies has now slipped to just 0.6 percent. Growth at this pace is notably slower than Citigroup Inc. (NYSE:C)’s estimated 1.5 percent “stall speed,” which in the past has been associated with sustained drops in growth and, at times, recession in these economies. The lower left panel shows the distribution of advanced economy growth rates over the past three decades, which provides a complementary perspective on these data. Only in 9 percent of the quarters has growth in the advanced economies been as weak (or weaker) than at present.
At a minimum, this discussion highlights the vulnerabilities of the advanced economies to further shocks. This is particularly the case given the diminished scope for macroeconomic stimulus relative to a decade ago. Rising public debt levels have left fiscal policy generally tapped out, and central bank balance sheets have already grown to unprecedented sizes. Going forward, Citi forecasts call for growth in the advanced economies to slowly pick up, led by a rebound in the United States, but to continue to hover near stall speed.
3. Household Indebtedness
Citigroup Inc. (NYSE:C) highlights the differing trajectory of household balance sheets across the four major advanced economies. In the United States and the United Kingdom, the years before the global financial crisis saw a steep rise in household indebtedness. In these two countries, household debt hovered around 70 percent of GDP in 2000 and climbed upward as the decade progressed, reaching a peak of 100 percent of GDP in the United States and 110 percent of GDP in United Kingdom. More recently, however, household debt has retreated by more than 15 percent of GDP in the United States and 10 percent of GDP in the United Kingdom.
4. Rising Levels of Public Debt
While household and corporate debt in the advanced economies has been on a flat or declining trajectory in the years since the global financial crisis, public sector indebtedness has shot upward. This surge has reflected two key drivers: First, the marked decline in economic activity through the crisis brought with it a sharp drop in tax revenues and an increase in support payments, such as unemployment benefits. Second, a range of discretionary policies were put in place to bolster economic activity and the banking system. The resulting rise in debt was particularly marked in the United Kingdom, where public debt rose from 45 percent of GDP at the onset of the economy crisis to 90 percent of GDP in 2012, and Japan where debt has now climbed to 240 percent of GDP. U.S. general government debt also rose sharply, from 65 percent of GDP to 105 percent of GDP, with a somewhat smaller but still significant increase in the euro area.
5. Bulging Central Bank Balance Sheets
The Bank of England’s balance sheet has posted the largest gains relative to GDP since the onset of the financial crisis, expanding by about 20 percentage points. The other central banks have also recorded sizable, albeit somewhat smaller increases, of roughly 15 to 20 percent of GDP. The timing of these increases has differed notably. The Fed saw the largest gains in its balance sheet early in the financial crisis, as it fought to restore liquidity to global financial markets. The ECB’s balance sheet grew most from early 2011 through mid-2012, as it worked to temper the euro area’s deepening crisis. The ECB, however, has recently been winding down these exposures as imminent pressures from the markets have receded. The Bank of Japan’s balance sheet recorded relatively tepid growth until mid-2010, but has since expanded significantly. With the advent of Abenomics, the size of the BOJ’s balance sheet is likely to move sharply higher in the years ahead.