Buiter on soggy global growth in 2015

Izabella Kaminska

| Mar 27 12:21

 http://ftalphaville.ft.com/2015/03/27/2125141/buiter-on-soggy-global-growth-in-2015/

Willem Buiter, Citi’s global chief economist, believes global growth will come in at somewhere between “moderate and modest” in 2015, with his team shaving their growth target from 3 per cent last month (and 3.3 per cent six months ago) to 2.9 per cent.
As Buiter noted in a meeting in London on Friday, it’s also unlikely that in the long run currency wars, which wash each other out, will help to drive demand:

Globally, disinflationary pressures are not going to disappear. All the exchange rate changes will do is redistribute this global disinflationary pressure from countries whose currencies are depreciating to those that are appreciating. But there appears to be a global output gap.
If you look at the global inflation which we see at about 2 per cent or something like that, so there is a world where collectively, despite all the attempts by what is now 24 central banks to decouple from the dollar by being more expansionary, there’s still not enough demand stimulus to burst this global disinflationary pattern.
One would hope that at some point the combined efforts of those who have significant negative output gaps would outweigh those of whom are closing them fast, but it seems there are very few countries which have a positive output gap at this point, so this is a soggy global growth report, especially given the steady deceleration of emerging markets almost without exception, apart from one bright shining light, but with everything else from China to Russia to Brazil and now also Mexico being revised steadily down, but I think there’s more to come in the case of China.

As to where the demand stimulus could come from in the future, Buiter noted there aren’t many obvious areas:

So we are in a world which could do with additional demand stimulus. It’s unlikely to get it from the US, it’s getting some from the euro area, but I’d say still quite limited, €1.1 trillion sounds like a lot in terms of balance sheet expansion but it is of course undoing the shrinkage that has already occurred. The Japanese are shoving it out but again, the dollar equivalent of the yen is not worth a dollar. The fact that the US has stopped injecting dollar liquidity probably subtracts more from overall global demand than what the europeans and the japanese are putting in at the moment.

According to Buiter that’s all down to the fact that US QE is more equal than others due to the dollar’s reserve status:

The dollar is the only global reserve currency worth the name. The euro is in intensive care still, the yen is too small, sterling nobody has heard of, and the renminbi is not ready for prime time yet. The dollar, strangely enough, with the US economically being somewhat well over its peak, the dollar is more dominant today than I remember in a long time. And we’ve got the end of the expansion of dollar liquidity, the steading of the balance sheet of the fed is probably not compensating for the global liquidity by what goes on in Europe and japan.

The good news is, despite the unprecedented nature of the economic situation, including the persistence of very low risk-free rates and the disappearance of risk-premia, the US is still growing — albeit in a confusing manner. As Buiter noted:

This makes for a very unusual and unprecedented combination of soggy growth and refusal to price risk in any meaningful way. The good news is that the US is still growing, and the data we have seen recently, retail sales, durable goods, is not just a version of frosty the snowman like we saw last year. If the strong payrolls end with the next set of data, then at least we have a consistent picture. This would explain how come it was cold enough for people not to go shopping but not cold enough not to go to work. Which is what we had, we had both last year which makes sense. At the moment i don’t fully understand what’s going on.

But, Buiter concluded, it’s the continued absence of capex which is more of a worry. This, in his opinion, leaves the Fed sitting on its hands until at least December — especially if it turns out that the growth we’ve seen is down to “the kindest tax cut of them all, the oil price decline”, which he said had been primarily funded by oil exporters.

This entry was posted by Izabella Kaminska on Friday March 27th, 2015 12:21. Tagged with Citi, Global growth, Willem Buiter.