World Bank whinging, Secular Stagnation and the Japanification of the global economy
Early signs are for some chop on global equity markets this year, but all in all investors still appear to be banking on the US Fed engineering a “soft landing” for the US economy.
That is, an eventual and uneventful return to the old norm – an economic situation characterised by the return to low inflation without much risk of a recession.
But – and there’s always one or two – the global economy is set to grow at its slowest pace since the pandemic, the World Bank has warned.
Yesterday, the bank of banks forecast growth of just 2.4% this year, reckoning higher interest rates to be a major factor in the projected fizzle.
Global trade and investment would continue to be slapped about by conflicts in Ukraine and the Middle East, according to the bank’s chief economist, Indermit Gill.
“Near-term growth will remain weak, leaving many developing countries – especially the poorest – stuck in a trap.”
Outside of the pandemic, growth of 2.4% would be the weakest since the 2009-09 financial crisis.
Gill says it was only the resilience of the US economy which led last year’s growth to clock in at a likely clip of 2.6%.
But – and there’s always four or five – according to Stephen Dover, chief market strategist and head of Franklin Templeton Institute, there’s a few extraneous variables out there this year which need to be factored in to any investment plans.
“In our view, a key surprise for 2024 could be the return of “secular stagnation,” an outcome of stall-speed growth and low inflation, accompanied by the return to very low nominal interest rates, which characterised US and global growth from 2010–2020.
“Whispers of ‘Japanification’ of the world economy could turn into shouting matches,” Dover warns.
A relatively new, alternative economic hypothesis – proposed in 2012 by the former US Treasury Secretary Larry Summers – is that a weak GDP reflects an unusually prolonged shortfall of aggregate demand rather than diminished supply. Summers’ argument echoes a 1937 warning (renewed shortly after World War II) from another Harvard economist, Alvin Hansen, who argued that the US would be stuck perpetually in a situation with excess savings, with the result that a large slice of American productivity would remain ever under-utilised.
Here’s why: The lagged effects of synchronous global monetary policy tightening, fading fiscal stimulus and the absence of decisive steps to boost growth in China could easily conspire to produce soft global demand in 2024.
Dover says that while recessions may end in Europe, any recoveries will likely be weak.
The US economy may avoid a technical recession – or it may not – but growth is likely to slow.
“Meanwhile, inflation will continue to fall, increasingly due to lower oil prices, softer rental rates and, outside the United States, currency appreciation against a fading US dollar.
“Soggy growth and the return to central-bank desired rates of inflation could mean that interest-rate cuts are on the way. Next year, benchmark 10-year US Treasury yields may plunge to 3.0%, and short-term interest rates could end the year more than 1.5 percentage points below prevailing levels.”
Dover reckons that herein lies the concern.
“Weak growth might not be temporary. If households remain in deleveraging mode, as they have been for more than a decade, business investment spending remains tepid, as it has been, and governments begin to rein in large budget deficits, fantasies of soft landings could become nightmares of global demand deficiency.
“In macroeconomics terms, 2024 could then look like a year of back to the future — the return of secular stagnation.”
Advances in artificial intelligence (AI), alternative energy and biochemistry – to name but a few – are accelerating intense change.
Space is next says Dover.
“Zero gravity offers an excellent environment for chemical engineering and other forms of innovative manufacturing, particularly for the manufacture of chemical compounds used in new drugs. It is also a superior environment for producing silicon chips (i.e., with far fewer flaws). Boosted by commercial space launches (think SpaceX), space manufacturing is poised to take off in 2024.
“It may even become the next fad in growth investing.”
Biomedical innovation should continue to save and enhance lives – rates of death from cancer in the United States are declining across almost all cohorts by gender and race.
“AI holds out the promise of turning routine, dull and repetitive human tasks into those performed by machines. If so, that’s a wonderful workplace improvement, provided that those displaced can find more meaningful, productive and higher-paying work elsewhere,“ Dover says.
“One does not have to be a Luddite to worry, however, that the transition for many will be difficult.“
“Saving the planet requires humankind to slow the emissions of greenhouse gases into the atmosphere and, eventually, to increase carbon capture. Scientific progress, through government support in the form of grants, is underway. Tax incentives and subsidies are hastening the transition.
“Those developments should continue, perhaps even at an accelerated pace, in 2024.”
“Perhaps there is no greater mystery in economics today than the disconnect between innovation and productivity. To paraphrase the late Nobel prize-winning economist, Robert Solow, innovation is seen everywhere but in productivity statistics.”
There’s several factors which may account for why innovation does not necessarily lead to increased productivity, according to Franklin Templeton.
“First, much innovation in recent decades has been consumption-oriented, rather than production-oriented. Video streaming, smartphones and virtual reality are all examples of innovations that make it easier to entertain us. But they don’t boost output per hour worked.
“Second, history suggests that some of the most productivity-enhancing innovations are those that vastly enhance communication and transportation speed, comfort and quality. The telegraph and telephones, autos and highways, computers and the internet, shortened distance and time, enabling humans to interact more closely and to build more efficient supply chains.
“Few of today’s innovations — from blockchain to AI — offer such networking gains.
“Third, truly big innovations — the cotton gin, electricity, the internal combustion engine or the assembly line — massively transformed how we produce and distribute goods and services. Today it is difficult to identify innovations making comparable transformations anytime soon.
“AI has that potential, but right now its level of cognition, as judged by autonomous driving, fails to even reach high-school levels (i.e., the age at which humans learn to drive).
“Finally, for all the advances in medicine, none as yet rival past innovations that most boosted life expectancy and the health of workers — the introduction of antibiotics, indoor plumbing or refrigerated food.
“All too often, we live in animated wonder, dazzled by modernity. Until, that is, we reflect on what has truly mattered in the past. Productivity is probably more mundane than our fascination with modern innovation suggests,” Dover says.
Although not an obvious economic issue, elections are another theme Franklin Templeton is studying this year.
“About 40 countries comprising over half the world’s population will go to the polls in 2024, and the fiscal implications could be significant. While the adage that politics is local remains true, the common denominator for global households is disenchantment with the establishment.
“Superficially, that seems odd, given that the global economy continues to grow, and inflation almost everywhere is coming down.
“Yet frustration runs deeper. In economic terms, voters discount the recent past because of lifetime memories of disappointment. Living standards for many have stagnated.
“That is important because happiness is as much relative as it is absolute. When many Americans, Europeans, Asians or Latin Americans ask themselves, ‘am I doing better than my parents or grandparents’, or ‘have I achieved as much as was expected of me or I expected of myself’, their answer is apt to be ‘no’.”
According to the Pew Research Centre over the past 50 years, the share of GDP garnered by middle-income Americans has fallen from 62% to 43%.
The corresponding share for the poorest Americans has fallen from 10% to 9%.
Meanwhile, the share going to upper-income Americans has risen from 29% to 48%.
“That is the stuff of broad-based disenchantment,” according to Dover.
“Moreover, unfulfilled expectations are only part of the story. Breakneck innovation, above all in AI, is deeply unsettling to many. Workers fear for their jobs and, perhaps for their identities, as the 2023 writers’ and actors’ strikes so aptly demonstrated.
“Those thinking that the end of the pandemic, the slaying of inflation and the avoidance of recession will lead to electoral victories for normality, orthodox policies and greater harmony in the electorate could be sorely disappointed with the outcomes in 2024.”
What goes up, must come down.
”In finance, as in physics, the laws of gravity have not been repealed.”
In the 15 years since the global financial crisis (GFC), low interest rates and the easing of financial conditions have allowed an explosion of debt financing globally. In an environment of low interest rates, it’s been a common sense call for a lot of companies to go take advantage of such a yummy low-cost source of funding.
But the ground has shifted, and quickly says Stephen Dover.
Since 2022, interest rates have risen rapidly in combination with a more challenging economic landscape.
“So far, credit markets have held up, at least if we overlook the failures of US regional banks and Credit Suisse in the spring of 2023.
”But to say that the worst is over seems complacent to us. The maturity of borrowing was lengthened after the GFC. That extends lags between rising interest rates and credit stress, but it does not eliminate them.
“At some point, credits need to be renewed, and new borrowings financed, both at higher rates of interest.
“It is almost impossible to know when or where cracks will emerge, but it seems reasonable to expect some to surface over the next 12 months. That’s because in addition to higher borrowing costs, many firms will also face weaker demand for their goods and services as the economy slows next year.”
Most lenders counter that their portfolios of loans are well diversified.
”That may be true when viewed through the prism of size, sectors or geography. But economic downturns and higher interest rates create common, not idiosyncratic, shocks. They hurt small and large alike, travel coast-to-coast and around the world, and impact many sectors.
“The coming year is therefore likely to herald a wake-up call,” Dover says. ”Default risk will likely be on the rise.”
”While divisions between high- and low-quality debt might well be contained, we believe a watchful eye on any spillover effects across the corporate credit landscape is warranted in 2024.”
“Global growth is projected to edge down in 2024, declining for the third consecutive year.
“For global growth, 2020-24 is expected to mark the weakest start to a decade in 30 years.
“Excluding China and India, EMDEs as a whole are set to make limited progress catching up to advanced economy levels of per capita income.
“The recent conflict in the Middle East has heightened geopolitical tensions and poses significant downside risks. Global cooperation is needed to tackle climate change, which threatens to worsen extreme poverty.
“ Decarbonizing the global economy will require sizable investments; however, investment growth is currently expected to remain weak, which highlights the need for policy action to bolster it.”