Crisis or not?

By Pedro Sousa

As we examine the state of the global economy, information suggests we are in an era of very limited growth. Larry Summers might be right in describing this as “secular stagnation“.

Does this mean we are facing economic crisis in 2016? Maybe not, but the global economy is vulnerable.

Nowadays, most OECD governments don’t have the financial muscle to kickstart their economies towards higher growth. Plus, as we have seen within the EU, there is a lack of political union to agree to put more money into the economy. Lack of economic governance is hindering the potential collective action that could translate into new investment plans in infrastructure, for example. The German government has always been averse to inflation and refuses to agree on fiscal flexibility for other eurozone countries. The ECB desperately tries to act cohesively within a union that is a working project. The President of the European Central Bank has warned that inflation remains worryingly low across the single currency bloc. This is a result of falling oil prices, slow economic growth and an average unemployment rate of 10.5%.

Low inflation creates fear in central bankers and economists as it is dangerously close to deflation, a self-reinforcing downward price spiral that is poisonous to growth and job creation. Further quantitative easing is expected from Mario Draghi in order to support the floundering eurozone economy. Financial markets have a huge hand in what happens to the global economy nowadays (‘global’ financial crisis), so stability in the financial sector needs to be enhanced.

The Chinese structural move that is causing a slowdown is not a surprise. It was expected and that is important because its impact should be handled in a prepared way. Moreover, China’s economic slowdown will serve to inform us how resilient emerging economies are.

In summary, I wouldn’t say we are having a crisis. But we are far from being economically well. We might be slowly getting out of a great recession, but only time will tell whether we do come out of it. We can argue over whether the approach being taken by governments and central banks is correct, but the direction, it seems, is very slow growth.

It is important to note that this situation is vulnerable. The global economy is weak, so some factors could lead to crisis. Primarily, these are: 1) emerging economies highly dependent on commodities could have a negative impact on global economic activity and 2) lack of strong economic governance which results in nationally-focused geoeconomic strategies. By this, I mean that the current multipolar disorder does not brew sound collective policies, and instead generates policies designed as economic weapons. This is nothing new, but appears to be the prevailing order of things. And with global growth being so fragile, coupled with the interconnected system we live in, it could escalate into a state of affairs where we face another economic crisis.

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