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Post-Crisis Growth and the Global Economy. Michael Spence January 2010. Outline. I am going to start with the major developing countries And spend a bit more time on China Because that is where growth is going to come from in the short and medium run
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Post-Crisis Growth and the Global Economy Michael Spence January 2010
Outline • I am going to start with the major developing countries • And spend a bit more time on China • Because that is where growth is going to come from in the short and medium run • And the systemically important developing countries are now important players in the global economy and policy setting • Then I will talk about the situation in the US • Comment briefly on some issues in Europe • Conclude with some thoughts on investment opportunities and strategy issues when there is periodic system risk
Developing Countries • Hit hard in 2008 by the crisis – following a difficult commodity price spike • Two main crisis transmission channels • 1. Credit (rapid exit of capital) • 2. Trade - shortly after • The major developing countries are restoring growth quickly • The issue is the medium term and its relation to Global Growth
Exchange Rate Movements Reflecting Capital FlowsIndian Rupee Against the Dollar
Trade Quarterly world merchandise export developments, 2005-09(2005Q1=100, in current US dollars) WTO
Developing Countries • Much higher than expected resilience • No toxic assets • Fiscal stability • Reserves • Domestic ownership of financial institutions • Current account surplus or balance - hence financing domestic investment from domestic savings • Rapid response to credit tightening and capital outflows
Lessons Learned from the Crisis in the Developing Countries • Self-regulating model rejected • Central banks (or some entity) needs to focus on system stability • Low inflation is not a sufficient statistic • Judgment will be needed and mistakes made • Some version of the utility banking model • Relation to the Volker Rule • Domestic ownership • Reserves • Controlled growth of plane vanilla shadow banking • Complex derivative securities • Clear Limits on Financial Globalization with a fragmented governance structure • Distributional issues
Global Aggregate Demand and Rebalancing • US Savings Rate Up • $1 trillion (+-) of aggregate demand missing • New normal in advanced countries • Deleveraging takes time • Unemployment high • Impact of government exit uncertainty • Banks and commercial real estate • Government “owns” the residential real estate financing market • Financial re-regulation uncertain • Fiscal stability in the US and political resolve • The Global Economy needs the surplus countries to reduce excess savings
But There is a ProblemThe Cyclical, Mean-Reverting View • Outside the advanced countries, there is a view • that the world will return to pre-crisis conditions, with a stable US as borrower, lender, and consumer of last resort. • This ignores is that pre-crisis growth in the US and the global economy was based in part on an unsustainable configuration. • Returning to that model is neither likely nor wise. • Waiting around for the advanced countries to right their ships so that we can all go back to the “old normal” is neither good policy nor a good bet.
China’s Balancing Act • Three related structural issues • 1. Microeconomic restructuring and the middle income transition • 2. Demand side restructuring • Household income up • Household savings down • 3. Elimination of excess savings and the current account surplus • This is NOT mainly an exchange rate issue • The west is wrong to obsess about the Renminbi • There is an issue of the effect of the peg or slow appreciation on the eurozone, the pound and the yen
Very High Investment Rate More than Fully Funded From Domestic Savings
Components of Savings: The Increase is in the Corporate Sector
China Rising Trade Exposure • Even as domestic economy becomes larger
The US Outlook • US recovery is important globally • It is a difficult moment to be optimistic • Financial sector bounced back • Real economy in trouble • Citizens and Congress angry • Re-regulation • Late • Tax on bonuses and threat to Fed independence • Volcker Rule • No credible plan for restoration of fiscal balance • Longer term growth and restructuring • Hard and soft infrastructure
Implications for Global Agenda • A US policy agenda • overloaded, • overwhelmingly domestically focused, • and partially paralyzed • Lack of attention to global issues • Coordinated monetary policy and exits • Rebalancing demand • WTO • Environmental issues • Climate change • Water security
European Issues • Fiscal imbalances • Absence of effective mechanisms to deal with them • European influence is mitigated in global policy issues by multiple voices • Copenhagen • Reform of IFI’s is waiting on • European decision to speak with one voice • US willingness to abandon veto
Investment Thoughts • Substantial macroeconomic risks • A bumpy ride with significant unresolved uncertainty • Opportunities greatest in countries where there is a continued focus on longer term growth • Right now that means the major developing countries • And the financial and business entities that engage with these markets • Markets have not internalized the non-mean reverting “new normal” environment • Asset prices will (perhaps are) resetting as the economic and political challenges become clearer
Periodic Systemic Risk • Regulatory reform momentum • Over-emphasis on regulatory failure • Self-regulation failed too • Internalization of risk and public liabilities
Implications for Investment Strategy • Attention to early warnings • Dynamic asset allocation • Effective management of liquidity • To limit losses from illiquidity • To facilitate asset allocation shifts • To profit from investment opportunities in periods of stress • Relative performance and needed new benchmarks
Bill Gross Risk/growth-oriented assets (as well as currencies) should be directed towards Asian/developing countries less levered and less easily prone to bubbling and therefore the negative deleveraging aspects of bubble popping. When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come. Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy.
