We’re revving the global economy’s engine, but still moving too slowly

The Globe and Mail

November 15, 2015

The G20 meeting beginning Sunday in Antalya, Turkey, offers an opportunity for economists, policy analysts and government officials to give themselves a maintenance and tune-up checkup. Seven years after the global financial crisis, global financial institutions such as the International Monetary Fund and World Bank can positively report that the world economy is growing at an overall 3.1-per-cent rate in gross domestic product this year.

Should we breathe a sigh of relief, then? No, because things are not that rosy when you consider the economic fundamentals at work today. Policy interventions and market forces should be producing an economic boom. Better positive than negative economic growth, you could argue, but our mediocre expansion looks even more troubling when we scratch the surface.

The global economy is like a car, and despite low and even negative interest rates promoted by central banks across the world and the dramatic drop in oil prices by nearly 50 per cent, we are revving the engine in a maddening way and yet we are still moving at a snail’s pace.

This mediocre economic growth is not just a struggle for oil-exporting countries such as Canada, Russia and the Arab Gulf countries, but also a challenge in the oil-importing countries and regions of Japan, the European Union, Latin America and China, where economic growth is visibly sputtering.

This ho-hum global economic growth is even more problematic when we consider that population growth is rising steadily, social expectations and demands are increasing, and economic growth is coming less from manufacturing, where jobs are visible, and instead coming from financial services, where speculators win more than people on the ground.

Countries such as China are especially vulnerable to these forces; its rapidly urbanizing population and increasingly aware and hyper-connected urban society are putting pressure on governments to keep up economic growth, or else.

Despite the Chinese government’s best efforts to claim that economic growth is hovering near the 7-per-cent mark, the slump in real estate sales, declining exports and decreased electricity consumption all point to a much more modest number.

Modestly rising interest rates in the United States relative to overseas markets are also pulling capital and investment away from emerging-market economies and back into traditional U.S. securities, such as Treasury bills. This is not good. It was the United States that sold the types of “creative” debt assets created by banks and hedge funds that got us into the mess of the global financial crisis in the first place. Meanwhile, the U.S. Federal Reserve keeps teasing markets with looming interest rate hikes, as the rest of the world waits in fear for the eventual announcement that might pull even more capital toward the world’s largest economy.

Yes, there have been some important reforms in the international financial system to hopefully stop this creativity that came at the expense of taxpayers and workers across the globe. But most economists will tell you that we are fooling ourselves if we think we have successfully diagnosed the problems under the hood. There are plenty of engine noises, and policy officials prefer to not look too hard, lest fixing might require rebuilding the entire engine. Simply put, we haven’t figured out all of the creative debt packages conjured up by Wall Street, but we do have better mechanisms to punish bad behaviours.

Having attended G20 meetings, as well as International Monetary Fund and World Bank meetings, I can tell you that diagnosis is not a specialty of economists. But record-low oil prices, low interest rates and less economic growth from the productive sectors are not a recipe for good health.

There are good things that come out of the G20 meetings: Stakeholders come together to talk about what can be done, how to better co-ordinate policies and what potential oversights need to be explored. Undoubtedly, there are competent people behind the wheel of the global economy. I just hope they don’t become complacent about the slow pace of economic growth.

Forget cruise-controlling the global economy – revving the engine needs to move us faster.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

CIGI Senior Fellow Bessma Momani has a Ph.D. in political science with a focus on international political economy and is full professor and interim assistant vice‑president of international relations at the University of Waterloo.