Bill Jamieson: Zombie unlikely to take up his bed and walk

For the past two months economic attention has been intensely focused on the EU referendum. A vote to remain may be greeted with relief by many after those dire warnings from the Treasury, the IMF, the Bank of England and others on the consequences of vote Leave.

The West hopes for rising imports and greater consumption in China. Picture: AFP/Getty

Doom and disaster will have been averted. The black clouds will lift. Now at last we can look beyond. But can we? The problem with the referendum battle in recent weeks is that it has obscured – if not blotted out – the signs of a continuing slowdown in the world economy beyond 24 June. Take the latest World Economic Outlook summary from the International Monetary Fund. Its downgrades of global growth were almost totally obliterated by the headline-grabbing remarks of IMF chief Christine Lagarde that the consequences for the UK of a vote to leave the EU would be “bad to very, very bad”.

The report’s main finding was that it had – once again – lowered its forecasts for the world economy, predicting global growth of 3.2 per cent this year and 3.5 per cent in 2017 (previous forecasts were for 3.4 per cent and 3.6 per cent respectively).

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Its chief economist, Maurice Obstfeld, described the pace of growth as “increasingly disappointing”. It is the second time this year that the IMF has downgraded its forecast. Only a year ago the prediction for 2016 was growth of 3.8 per cent. And last week the World Bank echoed this view, with a downgrading of its 2016 global growth forecast to 2.4 per cent from the 2.9 per cent pace projected in January – due to sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.

According to the latest update of its Global Economic Prospects report, commodity-exporting emerging markets and developing economies have struggled to adapt to lower prices for oil and other key commodities, and this accounts for 40 per cent of the downward revision. Growth in these economies is projected to advance at a mere 0.4 per cent this year, a downward revision of 1.2 percentage points from the January outlook.

So what’s going wrong? Why has it now taken the world seven years to shake off the 2008-09 trauma of the global banking crisis and subsequent recession?

Now it’s possible, says economics guru and former banker Satyajit Das, that the world could stage a Lazarus-like recovery. The US leads the way, Europe improves with Germany accepting debt mutualisation to preserve the euro while in Japan Abe-nomics revives the country’s economy. China makes a successful transition from debt-financed investment to consumption. Monetary policy around the world is normalised gradually. Higher tax revenues improve government finances.

But all this looks unlikely, he reckons. The fact that policies pursued to date have not led to a recovery after six years suggests that they are ineffective. “A general lack of demand,” he argues, “combined with demographics, slower improvements in productivity, reduced rates of innovation, resource constraints, environmental factors and rising inequality is likely to constrain growth. Overcapacity, technological improvements, competitive devaluations and a lack of pricing power is likely to keep inflation low, despite loose monetary conditions.”

So, if there is to be no Lazarus-like recovery, what more realistically, can we expect? His answer is not reassuring: a managed depression with a Japan‑like prolonged stagnation.

Economic growth remains weak and volatile. Inflation remains low. Debt levels continue to remain high or rise.

But the problems then become chronic requiring constant intervention in the form of fiscal stimulus and more Quantitative Easing programmes to avoid deterioration. “Financial repression becomes a constant with nations transferring wealth from savers to borrowers to manage the economy. Competition for growth and markets drives beggar-thy-neighbour policies, resulting in slowdowns in trade and capital movements.

“While there are variations between nations, overall the global economy becomes zombie-like, with entire nations, businesses and households trapped in a low growth, over-indebted state essentially on permanent life support. Resource allocation breaks down with more and more wealth trapped in low returning or unproductive activity.”

Such a downturn could be more severe than the 2008 crisis. The problems today are larger and more global. Finance ministers and central banks now have a limited capacity to respond, with interest rates already at near-record lows. And confidence in policy-makers is waning due to their ineffectiveness in engineering a recovery on the scale promised.

All this will push central banks into more extreme and desperate action, such as negative interest rates (effectively paying people to borrow) and large currency devaluations. “The unintended consequences of monetary experiments on an unprecedented scale are unpredictable. The risk of policy errors or poor execution, such as premature increases in rates, or withdrawal of liquidity support, is increasing.” Most investors, he adds for good measure, are oblivious to these rising risks.

Most, but not all: the last week saw one of the world’s most closely followed financiers piling his £21 billion fund into gold as yields on government debt had fallen to a record lows. His name? George Soros. Its mere mention triggers trembling at the Treasury. We may vote to avoid all those terrible predictions of recent weeks. But we could still be sailing towards troubled waters ahead.