Five years after the 2008-9 global financial crisis, the global economy is still struggling to find its right footing.
This is despite trillions of dollars that have been pumped into various economies under “quantitative easing” programmes.
Global demand is still below pre-crisis levels, and most economies are still struggling with high unemployment, deflation and China’s economic growth rate seems to be losing steam after decades of double digit growth rate. Lower crude oil prices could drive inflation in key economies into near zero range.
In last week’s column I highlighted how much money has been pumped into the global economy by key economies like the US. While this liquidity has to some extent supported the world’s biggest economies back on their feet, the question is, how sustainable is that recovery?
The US Fed Reserve will continue to hold financial assets bought under its quantitative easing programmes, so will the Bank of England, while the Bank of Japan will continue to pump more liquidity into its economy.
There is growing pressure for the European Central Bank to further support the Eurozone economy. Interest rates are at record low levels in most countries but demand seems very sticky on the low side. It is clear that the global economy is yet to be out of the woods.
Japan, which is still going through its quantitative easing programme, raised its sales tax mid-2014. Data published last Monday shows that as a result of the sales tax hike which weakened consumer spending, Japan’s economy shrank by 7,3% in the second quarter and contracted 1,6% in the quarter to end-September, signaling the fourth recession since 2008. What it means is that Japan is in technical recession.
The economic model of fiscal austerity, tax increases and quantitative easing, commonly called Abenomics, after Japan’s Prime Minister, Shizno Abe, has obviously failed to work. For the world’s economy, this has far-reaching implications given that Japan is the third largest economy in the world.
Japan, on the other hand, is the world’s fourth-biggest importer of crude oil. A weaker Japanese economy would put further pressure on the already weaker brent crude oil price, which is now below US$80 per barrel.
For economies, mainly in Europe and US that are struggling with deflation or near zero inflation, lower oil prices will exert further downward pressure on the inflation rates
The euro-zone hasn’t had an impressive recovery either.
Economic growth during the first quarter of 2014 was a measly 1,2%.
The region’s October 2014 inflation of 0,4% is a far cry from the ECB’s target of almost 2%. High unemployment, measured at 11,5% in September is still a challenge.
The unemployment rate in the region range from the lowest rate of 5% in Germany to as high as over 25% in Greece.
Echoes from the market show that all is not well in the region.
The most significant of the concerns came from Britain’s Prime Minister David Cameron in a November 17 piece in The Guardian in which he points out that “red warning lights are once again flashing on the dashboard of the global economy”.
He notes that the euro-zone is on the brink of a recession and that emerging economies, which supported early recovery of the global economy, are also slowing down. The epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are not helping.
China’s 2014 third quarter GDP growth rate of 7,3% was the slowest in five years as it struggles with weak domestic demand and slower industrial production.
For China, this could be the beginning of a “normal” growth rate for an economy that has been growing at double digit rates for some time now. On this slower growth rate, The Economist notes that “even dragons tire”. A weaker China would drag global economic growth down.
As long as the global economy recovery path remains shaky, expect more expansionary fiscal and monetary policies.
That is low interest rate regimes, high level of liquidity and aggressive quantitative easing programmes. Even though the ECB has adopted measures to re-ignite the Eurozone economic growth by lowering interest rates to 0,05% and buying financial assets, it remains under pressure to get more aggressive with its expansionary policies.
Pressure remains on the ECB President Mario Draghi to expand the ECB quantitative easing programme. The central bank has already launched a number of stimulus measures to reverse the risk of deflation within the region.
With key economies in or facing recession, high unemployment and deflation, could we be facing the prospect of another global economic recession? The downside risk seems high. If not, we are bound to experience a protracted recovery of the global economy.
Nesbert Ruwo is an investment banker based in South Africa. He can be contacted on email@example.com