Averting a 'Great Stagnation'

World leaders are under the gun as warnings of a gathering storm have been echoed in market nervousness.

The loss in equities value of US$4.4 trillion (S$5.6 trillion) across the globe after reaching a peak a month back is a telling rebuff. There is too much debt in financial systems since the global meltdown, and reforms to address the matter are incomplete. Europe has not moved and recession - even Japan-style deflation - is a possibility in the euro zone after Germany reported a quarterly contraction.

The continued import slump in Europe, one of the two main demand markets, will prolong production declines in the BRIC economies, among which India and Brazil are facing difficulties. Japan is not living up to its Abenomics hype, not helped by an ill-timed sales tax increase. The United States and China are in a holding pattern.

That IMF projections are subject to geostrategic imponderables is heightening the uncertainty. Especially fraught just now is a convergence of factors. No-one can predict the extent of the damage that the Ebola outbreak could cause. The Russia-Ukraine crisis will weigh on Europe's recovery.

If the US is again pinned down in West Asia should the campaign against ISIS progress to an inconclusive land war, the world could be staring at another dip. Financialisation, the capitalist economy's pronounced shift from production to finance, has been blamed for the huge bubble that led to the financial crisis in 2008.

Quantitative easing as a non-conventional monetary tool of last resort helped to avert a global economic collapse. But as six years of the prescription has shown, it is not successful in producing a strong global recovery. Critics say the policy was akin to combating financialisation by more financialisation.

The danger was highlighted in an IMF warning cited by Harvard don Gautam Mukunda that "once the (financial) sector becomes too large - when private-sector credit reaches 80 per cent to 100 per cent of GDP - it actually inhibits growth and increases volatility. In the US in 2012, private-sector credit was 183.8 per cent of GDP".

Rebalancing calls for more than just reliance on monetary and fiscal policies. A long-term perspective is needed to address risks and the challenges of growth. This means tackling structural reforms today rather than kicking the can down the road.

Infrastructural improvements and tackling social inequality can help shield economies from a prolonged period of sub-par growth. G-20 finance ministers have crafted a global initiative in infrastructure building that they say can boost global growth by US$2 trillion over five years. The coming G-20 leaders summit in Australia should give the plan a fillip. 

This article was first published on Oct 15, 2014.
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