From an economic standpoint, we are entering an era of diminished expectations and increased uncertainty. In terms of growth, the world will have to live with less. To understand the implications of this, consider the following: If the global economy grew at its pre-crisis pace (more than 5% per year) for the foreseeable future, its size would double in less than 15 years; at 3%, doubling world GDP would take about 25 years.
This makes a significant difference to the speed at which wealth creation occurs, with profound effects on expectations. We ignore the power of compound growth to our detriment.
The world’s four largest economies are currently undergoing major transitions. The US is striving to boost growth in a fractured political environment. China is moving from a growth model based on investment and exports to one led by internal demand. Europe is struggling to preserve the integrity of its common currency while resolving a multitude of complex institutional issues. And Japan is trying to combat two decades of deflation with aggressive and unconventional monetary policies.
Global economic interdependence heightened the risk of large unintended consequences.
Global economic interdependence heightened the risk of large unintended consequences.
The Fed’s QE policy, and variants of it elsewhere, have caused the major central banks’ balance sheets to expand dramatically (from $5-6 trillion prior to the crisis to almost $20 trillion now), causing financial markets to become addicted to easy money. This has led, in turn, to a global search for yield, artificial asset-price inflation, and misallocation of capital.
As a result, the longer QE lasts, the greater the collateral damage to the real economy. The concern now is that when the Fed begins to taper QE and dollar liquidity drains from global markets, structural problems and imbalances will resurface. After all, competitiveness-enhancing reforms in many advanced economies remain far from complete, while the ratio of these countries’ total public and private debt to GDP is now 30% higher than before the crisis.
The greatest risk for the eurozone in the foreseeable future is not a disorderly exit by some countries, but rather a prolonged period of stagnant growth and high unemployment.
Meanwhile, the emerging-market slowdown may well persist, particularly in the largest economies. Over the past 15 years, the BRICs (Brazil, Russia, India, and China) have achieved remarkable progress.
So-called second-generation reforms, which are more structural in nature, are vital to long-term growth but much more difficult to realize. Elimination of subsidies, labor market and judicial reforms, and effective anti-corruption measures are politically charged and often are blocked (in some countries) by powerful vested interests.
Ultimately, however, the path to sustained growth requires not just new policies, but also a new mindset. Our societies must become more entrepreneurial, more focused on establishing gender parity, and more rooted in social inclusion. There simply is no other way to return the global economy to a path of strong and sustained growth.
Source: Project-Syndicate Org. Klaus Schwab Founder and Executive Chairman, World Economic Forum
Back in 2007, emerging-market growth was expected to outpace that of advanced economies by a wide margin, before converging. Today, the advanced economies contribute more to global GDP growth than emerging countries, where growth is forecast to average 4% in the coming years.
Economic conditions are slowly improving in high-income countries, but a range of downward pressures may persist for years. The US economy, for example, remains stuck in a subpar recovery: inflation is too low and unemployment is too high. Official data have often been better than expected, reflecting how resilient, adaptive, and innovative the US economy is, but pre-crisis consumer-spending and growth patterns are unlikely to recur.
The greatest risk for the eurozone in the foreseeable future is not a disorderly exit by some countries, but rather a prolonged period of stagnant growth and high unemployment.
Meanwhile, the emerging-market slowdown may well persist, particularly in the largest economies. Over the past 15 years, the BRICs (Brazil, Russia, India, and China) have achieved remarkable progress.
So-called second-generation reforms, which are more structural in nature, are vital to long-term growth but much more difficult to realize. Elimination of subsidies, labor market and judicial reforms, and effective anti-corruption measures are politically charged and often are blocked (in some countries) by powerful vested interests.
Ultimately, however, the path to sustained growth requires not just new policies, but also a new mindset. Our societies must become more entrepreneurial, more focused on establishing gender parity, and more rooted in social inclusion. There simply is no other way to return the global economy to a path of strong and sustained growth.
Source: Project-Syndicate Org. Klaus Schwab Founder and Executive Chairman, World Economic Forum
