Global Economy: When The Future Becomes Today by BIS annual report
When The Future Becomes Today
The global expansion continues. But the economy still conveys a sense of uneven and unfinished adjustment. Expectations have not been met, confidence has not been restored, and huge swings in exchange rates and commodity prices in the past year hint at the need for a fundamental realignment. How far removed are we from a robust and sustainable global expansion?
When put in perspective, standard metrics indicate that macroeconomic performance is not as dire as the rhetoric may sometimes suggest (Graph I.1). True, global growth forecasts have been revised downwards once more, as they consistently have been since the Great Financial Crisis. But growth rates are not that far away from historical averages, and in a number of significant cases they are above estimates of potential. In fact, once adjusted for demographic trends, growth per working age person is even slightly above long-run trends (Chapter III). Similarly, unemployment rates have generally declined and in many cases are close to historical norms or estimates of full employment. And although inflation is still below specific targets in large advanced economies, it may be regarded as broadly in line with notions of price stability. Indeed, the downbeat expression “ongoing recovery” does not do full justice to how far the global economy has come since the crisis.
Less comforting is the context in which those economic gauges are evolving and what they might tell us about the future. One could speak of a “risky trinity”: productivity growth that is unusually low, casting a shadow over future improvements in living standards; global debt levels that are historically high, raising financial stability risks; and a room for policy maneuver that is remarkably narrow, leaving the global economy highly exposed.
As noted in last year’s Annual Report, a highly visible and much debated sign of this discomfort has been exceptionally and persistently low interest rates. And they have fallen even further since then (Graph I.2, left-hand panel). Inflation-adjusted policy rates have edged deeper below zero, continuing the longest postwar period in negative territory. Moreover, the Bank of Japan has joined the ECB, Sveriges Riksbank, Danmarks Nationalbank and the Swiss National Bank in adopting negative nominal policy rates. And at the end of May, close to $8 trillion in sovereign debt, including at long maturities, was trading at negative yields – a new record (Graph I.2, right-hand panel).
These interest rates tell us many things. They tell us that market participants look to the future with a degree of apprehension; that despite huge central bank efforts post-crisis, inflation has remained stubbornly low and output growth disappointing; and that monetary policy has been overburdened for far too long. The contrast between global growth that is not far from historical averages and interest rates that are so low is particularly stark. That contrast is also reflected in signs of fragility in financial markets and of tensions in foreign exchange markets.
Interpreting the evolution of the global economy is fraught with difficulties, but it is necessary if we are to identify possible remedies. As we have in recent Annual Reports, we offer an interpretation using a lens that focuses on financial, global and medium-term aspects. We suggest that the current predicament in no small measure reflects the failure to get to grips with hugely costly financial booms and busts (“financial cycles”). These have left long-lasting economic scars and have made robust, balanced and sustainable global expansion hard to achieve – the hallmark of uneven recovery from a balance sheet recession. Debt has been acting as a political and social substitute for income growth for far too long.
This interpretation argues for an urgent rebalancing of policy to focus more on structural measures, on financial developments and on the medium term. A key element of this rebalancing would be a keener appreciation of the cumulative impact of policies on the stocks of debt, on the allocation of resources and on the room for policy maneuver. For it is this lack of appreciation that constrains options when the future eventually becomes today. Intertemporal trade-offs are of the essence.
In this Annual Report, we update and further explore some of these themes and the tough analytical and policy challenges they raise. This chapter provides an overview of the issues. It looks first at the evolution of the global economy during the past year. It then digs deeper into some of the forces at play, putting the elements of needed macroeconomic realignments in a longer-term perspective and assessing the risks ahead. The chapter concludes with the resulting policy considerations.
The Global Economy: Salient Developments In The Past Year
By and large, the performance of the global economy in the year under review traced patterns seen in previous years, with signs of recurrent tension between macroeconomic developments and financial markets.
Global output again grew more slowly than expected, although at 3.2% in 2015 it was only slightly lower than in 2014 and not far from its 1982–2007 average (Chapter III). On balance, the projected rotation of growth from emerging market economies (EMEs) to advanced economies failed to materialize, as advanced economies did not strengthen enough to compensate for weakness in commodity-exporting EMEs. At the time of writing, consensus forecasts point to growth strengthening gradually in advanced economies and bouncing back more strongly in EMEs.
Labor markets proved more resilient. In most advanced economies, including all the largest jurisdictions, unemployment rates continued to decline. By the end of 2015, the aggregate rate was down to 6.5%, its level in 2008 before the bulk of its surge during the crisis. Even so, in some cases, unemployment remained uncomfortably high, notably in the euro area and among the young. The picture was more mixed in EMEs, with major weakness as well as some strength, but their aggregate unemployment rate edged up slightly.
This differential performance – improving employment but moderate output growth – points to weak productivity growth, the first element of the risky trinity (Graph I.3, left-hand panel). Productivity growth remained on the low side, continuing the long-term decline that had been visible at least in advanced economies and that had accelerated in those hit by the crisis.
Inflation stayed generally subdued, except in some EMEs – notably in Latin America – that experienced sharp currency depreciations (Chapter IV). In the largest advanced economies that are home to international currencies, underlying (core) inflation, while remaining below targets, moved up even as headline rates remained considerably lower. Low inflation also prevailed in much of Asia and the Pacific and in smaller advanced economies.
Once more, a critical factor in these developments was the further drop in prices for commodities, especially oil. After some signs of a pickup during the first half of last year, oil prices resumed their plunge before recovering somewhat in recent months. The generalized drop in commodity prices helps explain growth patterns across commodity exporters and importers (Chapter III). The resultant contraction in commodity exporters was only partly offset by currency depreciations against the backdrop of an appreciating US dollar. Similarly, the commodity price declines shed light on the wedge that opened up between headline