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Aditya Chakrabortty: A glimpse of what a real crash looks like
This episode doesn’t smell to me like apocalypse now. But what we are seeing are the structural weaknesses of the post-2008 recovery, and we’re getting a glimpse of what a real crash could look like. True, the FTSE is now down over 20% and officially in bear-market territory, where share prices are expected to keep falling. But this isn’t because of some flash of spectacular bad news: it’s because central banks, especially the US Federal Reserve, are signalling to markets that they’re ready to make borrowing more expensive, and markets are struggling to adjust.
The question is whether central bankers keep to that path even as investors and businesses lose confidence. At the end of last year, the Bank of England head, Mark Carney, hinted that interest rates were about to rise. Just last week, however, Carney changed his tune. Similarly, the boss of the European Central Bank, Mario Draghi, sent assets plunging in December when he failed to increase its quantitative easing stimulus programme. Last week, however, he said the ECB could “reconsider”.
And here is the nub of the problem. The way the west got out of the 2008 crash was by relying on central bankers being generous in their provision of ultra-cheap loans. The hot money was sprayed into London property, commodities, or art auctions. And the gains ended up in the pockets of those already rich, rather than those who might use the money for consumption or to invest productively. Take away the credit and, as the IMF reminded us last week, the outlook goes dark pretty quickly.
Aditya Chakrabortty is the Guardian’s senior economics writer
Albert Edwards: A global recession is on its way
The Federal Reserve’s pursuit of loose monetary policies since 2009 has been a misguided attempt to boost economic growth via asset price inflation, and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad). One of the main problems has been the Fed’s overconfidence. Yet in the run-up to the 2008 crisis it demonstrated its lack of understanding of the disastrous impact of excessively low interest rates. Even in retrospect it remains in denial.
Further, we will probably see a trade war not unlike that in the 1930s. There are already signs of stresses and strains. World trade growth actually declined for most of last year. On 23 December the US imposed punitive sanctions on Chinese steel imports. Hence as renminbi devaluation accelerates, and a new more deadly phase of the global currency war unfolds, we are set to slide into another global recession. And can investors really be sure that policymakers won’t repeat the mistakes of the 1930s, and avoid an outright deflationary bust accompanied by a trade war?
Albert Edwards heads the global strategy team at Société Générale
Linda Yueh: The UK can withstand trouble in China
For China, there will most likely be another market crash. Indeed, the normalisation of US monetary policy is compounded by a slowdown the Chinese economy, where stock markets have crashed twice in six months.
China’s global impact has led to widespread declines in commodity prices. Oil prices continue to fall this year, down some 20% in just three weeks. And that’s why the UK stock market is falling. But that doesn’t mean that further UK stock market falls will trigger a recession. The UK never attained the highs of the US stock markets, which establish numerous records in recent years.
Likewise, cheap cash injected under quantitative easing also helped push markets, from Germany to India, to record levels. As that cheap cash comes to an end, it shouldn’t be surprising that the froth is coming off some equity markets, including Britain’s.
Linda Yueh is adjunct professor of economics, London Business School
Ruth Lea: Don’t mistake turbulence for a storm
There seems to be gloom about the slowing Chinese economy, but it is still growing impressively despite its transition from super-fast growth – driven by investment, exports and a rapid build-up of debt – to a mature model favouring consumer spending.
But many of the world’s leading economies have relatively little exposure toChina and will hardly be affected by its slowdown. Much is made of the collapse in oil prices. But this seems more the result of oversupply, reflecting Opec’s intransigence over cuts and the prospects of increased Iranian supply, rather than of collapsing demand. Of course it will hurt oil exporters like Nigeria and Venezuela. But by boosting incomes, falling oil prices will surely boost global consumption, not least of all in the US, the UK and the eurozone.
While there is little doubt that turbulent stock markets are “headwinds”, their economic impact should be kept in perspective. Many of the world’s major economies are growing well.
Ruth Lea is head economic adviser at Arbuthnot Banking Group
Fred Harrison: A British recession will happen in 2019
Britain is on course for a recession in 2019, a year before the general election. The crash will not happen before then because politicians and central bankers will appear not to lose their nerves.
The QE (quantitative easing) solution to the 2008 crash has rendered monetary policy useless as a fine-tuning instrument. Policymakers failed to adopt fiscal reforms that could have rescued the UK, so politicians have no tools to guide Britain out of the current turbulence.
Worldwide, central bankers will talk up any good news, hoping to persuade consumers to spend, even as wages continue to be battered. In the US the Fed will not take any chances in the run-up to November’s presidential election. Oil producers will finally do a deal to drive up petrol prices, which will be sold as a step towards normality. Debts will continue to grow, until a peak in house prices in 2019. Then the game will be up.
Fred Harrison is an economics commentator and author of Boom Bust
Dambisa Moyo: The major economies have strong roots
The major economies of the world – the US, Europe, China and Japan, which make up about 70% of global GDP – are all doing markedly better than just five years ago. The US economy is supported by solid performance in the household consumer and housing markets, and there is economic resurgence in countries such as France and Spain.
Meanwhile, China’s GDP estimates remain close to 7%. Of course, there are concerns at the reverberations of a China slowdown across the rest of the world, but China’s economic transition from an investment- to consumer-based economy was never going to be linear.
The collapse of oil prices by nearly $65 a barrel over the past six months should help support global consumer demand, and buoy economic growth. Despite the decidedly bearish commentary, organisations such as the IMF and the OECD still have global growth forecasts for this year and the foreseeable future at around 3.5% per annum. The defining issue of our time is the prospect of persistently low global growth.
Dambisa Moyo is a global economist and author of How the West Was Lost
Vicky Pryce: All eyes should be on the policymakers
Much of what we are witnessing is a much-needed correction from an over-valuation of stocks. It was clear for some time that China was slowing. And the impact of over-supply of commodities, particularly oil, was all too obvious. The good news is that the west is still expanding, albeit more slowly, and will be helped by the drop in oil prices. Much will depend on policymakers’ response. The first rise in US interest rates for 10 years was premature. It will need to be reversed, or at least other planned increases put on hold.
The ECB is already hinting at more aggressive quantitative easing, justified by the fact that low oil prices should push inflation even further below 2%. But easier monetary policy is reaching its limits of effectiveness. What is now needed is a rethink of our obsession with balanced budgets.
Vicky Pryce is chief adviser at the Centre for Economics and Business Research
Yanis Varoufakis: Should we be afraid? Yes
The money markets welcomed the New Year with atypical gloom. They had good cause.
Even before China’s markets went into a spasm last year, global income (measured in dollars) declined for the first time since 2009. The dark clouds got darker when news broke out that Chinese companies are eagerly borrowing in remnimbi to pay down their dollar debts, in a race against the clock before a dollar crunch snuffs them out. Beijing’s potential loss of control of its currency trades generated fears of an undeclared, debilitating currency war.
But is there a danger of another 2008? While this is unknowable, the danger of a new recession is clear and present.
Before 2008, America’s twin deficits had been maintaining an unstable global equilibrium by sucking into the United States the world’s net exports and the surplus capital needed to finance them. That odd recycling mechanism, and the capital flows into Wall Street it generated, allowed for the financialisation frenzy which turbocharged private debt. When its bubbles burst, the financial sector had a near death experience and the Great Recession was upon us.
Besides the ‘generous’ taxpayers and the energetic central bankers, it was the emerging economies that helped replace part of the aggregate demand that the West had ‘lost’. Taking advantage of zero US interest rates, and banking on the belief that the dollar would keep depreciating, corporations in China, Brazil etc. borrowed more than four trillion dollars (see the Bank for International Settlements).
Today, global capitalism is threatened with mountainous emerging market debt private sector (and the probability of sequential defaults as interest rates rise and the remnimbi falls). If this happens, can emerging economies expect the West to counterbalance global capitalism (as they did in 2008)?
Not a chance! Western financial asset prices and legacy public debt (following the bank rescues) are at historic highs, austerian Europe remains an exporter of deflation, and what little growth is generated (e.g. in Spain, Portugal and Ireland) has come from new private debt. Last, but not least, more than four trillion dollars of savings are slushing around in Western financial institutions refusing to be invested in activities capable of producing the incomes needed to pay down debts private and public.
Should we be afraid? Yes, we should. Is it inevitable that a new 2008 is around the corner? In political economics, nothing is inevitable. Except for our political classes’ determination to opt for motivated denial if the prevention of preventable crises costs them the approval of the mighty.
Yanis Varoufakis is the former finance minister of Greece
Mariana Mazzucato: The faltering economy will not crash
The 2008 crisis was caused by excessive private debt. A key cause of this increase was stagnant real incomes, so credit was used to keep living standards constant. Rather than curing the cause of this, most of the “reform” after the crisis focused on reducing public debt levels. And as austerity kicked in, public debt continued to rise due to the effect of falling economic growth on tax receipts.
While the economy is not about to crash, it is continuing on a downwards spiral: personal debt levels are close to what they were in 2008, lack of investment has caused incomes to falter, and commodity price changes have revealed the imbalances in economies over-reliant on natural resources.
The biggest problem is that the financial sector is not working for the real economy, but against it. On top of that, companies are increasingly financialised, focusing on areas like share buybacks to boost stock options and executive pay, rather than on investment.
The global economy is in dire straits: a result of bad choices in both government and business.
Mariana Mazzucato is an economics professor at Sussex University