Introduction Global Economic Outlook, Q4 2016
In the Q4 issue of the Global Economic Outlook , our far-flung economists offer their views on the United States, Eurozone, China, Japan, India, Russia, Brazil, Canada, and helicopter money.
The global economy has lately been characterized by relatively slow growth, weak business investment, persistent deflationary pressures, and slow growth of cross-border trade in goods and services. These issues have led to concerns that the current policy mix in major economies is not up to the task of fueling faster growth. Indeed, in the major developed economies, monetary policy seems to be the only game in town, with few countries focused on fiscal or structural actions. In this issue of Deloitte’s quarterly Global Economic Outlook, our far-flung economists offer views on each of the major economies in the world. A common theme appears to be either inadequacy of policy actions or uncertainty about what policy makers will do.
We begin with our article on the US economy, in which Patricia Buckley says that growth is likely to be better in the second half than in the first. She notes that the sharp decline in inventories sets the stage for a revival of growth. In addition, she points to the continued strength of the labor market as fueling consumer spending. Plus, an unusually large increase in real household income not only bodes well for spending but also helps to reverse the rise in income inequality. Patricia concludes that the US economy remains strong and that the major risks to the economy come from external events as well as the upcoming presidential election.
Alexander Börsch offers our next article on the Eurozone. He focuses mainly on the potential impact of the UK Brexit referendum on the other European economies. He notes that the initial fears about financial market disruption have been allayed by a quick response from the European Central Bank. He also discusses the mainly incompatible negotiating positions of the United Kingdom and the European Union, rendering likely a period of uncertainty. He concludes that the negotiations will probably dominate the agenda of EU leaders in the next few years. A close economic relationship between the two is seen as optimal, but differences over immigration policy could undermine such relations.
In my article on China, I discuss the continuing debate over the dangers of debt in the Chinese economy. I point to a study from the Bank for International Settlements that suggests that China’s debt relative to GDP is unusually and dangerously high. Despite this, I point to data showing that credit creation in China is accelerating, particularly in the household sector. While this has been intentional on the part of policy makers who are keen to avoid a deeper economic slowdown, it exacerbates longer-term problems. Meanwhile, I point to recent data suggesting that the Chinese economy may be stabilizing after a period of deceleration.
In his article on Japan’s economy, Akrur Barua says that an unusually aggressive monetary policy, involving massive asset purchases and negative policy interest rates, has failed to achieve its goals. Although the Bank of Japan has recently signaled an intention to ease policy even further, Akrur suggests that monetary policy may have gone as far as it can. Rather, he suggests that the government might benefit from implementing the third arrow of Abenomics: structural reform. However, the government has, instead, focused on a modest boost to the second arrow, fiscal stimulus, and Akrur does not expect this to be especially effective.
India is the focus of our next article, written by Rumki Majumdar. She says that although the Indian economy faces some headwinds, new legislation involving tax and bankruptcy reforms could set the stage for an acceleration of growth. Moreover, these reforms are likely to embolden the government in attempting to enact labor market reforms. Such action would ease the cost of doing business, promote more employment, and stimulate more inbound foreign investment. As for the latter, the government is also attempting to ease restrictions on such investment.
In our next article, Lester Gunnion examines the Russian economy. He says that there are signs that the period of declining activity may be coming to an end, and that the Russian economy might have hit bottom. He points to a stable currency, slowing inflation, an easing of monetary policy, and a revival in oil production. Yet he also raises concerns that a number of headwinds will prevent a robust recovery. These include continued Western sanctions, which are having a chilling effect on inbound investment in the energy sector. Moreover, weak foreign investment will inhibit the diversification of Russia’s economy that is so badly needed. In addition, Lester notes continuing weakness of income growth and consumer spending.
Brazil is the focus of Akrur Barua’s next article. The country that hosted the recent Olympic Games continues to suffer from one of its worst downturns in modern times. With inflation remaining high and fiscal mismanagement over the past year, the central bank has been compelled to keep monetary policy tight, thereby inhibiting an economic recovery. Yet, with the currency having risen, there is reason to expect a deceleration of inflation. Indeed, inflation has been slowing this year, prompting the central bank to cut its policy rate for the first time in four years in October. A tighter fiscal policy could give the central bank the wiggle room to ease policy further. Thus the basis for a rebound appears to be developing.
In his article on Canada, Daniel Bachman bemoans the continued weakness of the economy. He says that despite a weak currency, non-oil exports have failed to revive sufficiently to drive growth. Moreover, the central bank is not yet comfortable with easing monetary policy, given continued relatively high inflation. On the other hand, the potential fiscal stimulus planned by the government could help to boost growth going forward. Beyond the short-term economic outlook, Danny also devotes considerable attention to the planned free-trade agreement between Canada and the European Union. He discusses what is holding up the agreement despite its recent completion, the impact of Brexit on EU thinking, as well as the potential impact of the Canadian deal on a similar planned EU deal with the United States.
For our last article, Akrur Barua looks at the oddly named issue of “helicopter money.” This is the idea that a central bank can circumvent the banking system and simply drop money from the sky—or to be more precise, it can fund government spending by just boosting the money supply. The idea is that, when the financial system is not functioning properly, this might be a useful alternative to traditional policy. Helicopter money was first suggested by Milton Friedman and later discussed by former Fed chairman Ben Bernanke, who came to be known as “helicopter Ben.” In his article, Akrur discusses what helicopter money entails, how it is different from quantitative easing, and why it may or may not be effective in dealing with today’s challenges. Akrur concludes that the major country most likely to try this policy is Japan.