RaboResearch - Economic Research

Dit artikel is ook beschikbaar in het Nederlands

Global economic outlook: through the turbulence to the upward thermal

Economic Quarterly Report

  • Global economy is growing slowly
  • Problems in the eurozone are not yet solved
  • After the Brexit referendum, Europe will never be the same
  • Risks in the short term a threat to growth
  • Underlying trends offer opportunities for faster growth 

Behind the clouds ….

The current picture of the global economy has not changed that much from the picture we presented in our previous Economic Quarterly. The United States will post moderate growth for the seventh consecutive year. Unemployment has clearly fallen in recent years, and the Federal Reserve is considering a further increase in its policy interest rate. The eurozone is still lagging, but is also showing a modest and continuing recovery, although despite the criticism it has attracted the ECB is not likely to tighten monetary policy. Elsewhere in the world we have a mixed picture, ranging from a deep recession in Brazil, serious financial problems in oil-producing countries and slower growth in China to strong growth in India at the other end of the spectrum.

Not much cause for optimism

Virtually all the risks could lead to lower growth than we are currently forecasting. To start close to home: the recovery in Europe is far from convincing. Eurozone GDP will return to its pre-crisis level this year. However behind this figure, the situation in the eurozone is very diverse. Only Ireland’s economy has convincingly emerged from the crisis and is now around 10% larger than it was in 2008. In Southern Europe, the picture is worse than the average, especially in the labour market. With unemployment at around 20% of the working population and youth unemployment close to 50%, it is clear that the current rate of growth is too low to offer people any positive prospects. This is not only socially unacceptable, it also means that every election will call into question a policy consensus that in most cases was difficult to reach in the first place.

Briefly, Europe still has problems. This is especially true if we look at the British referendum on a Brexit. While the polls are still suggesting that the UK will decide to remain a member of the EU, the outcome will be close. If the UK decides to leave the EU, this will mark the first step towards European disintegration, with consequences that are difficult to predict at this time. But even if the UK decides to remain, the referendum will leave its mark on the tenor of future European cooperation.

Finally, the ECB’s monetary policy is encountering increasing resistance, particularly in Northern Europe. The positive effects aimed at through quantitative easing on growth and inflation are not adequately recognised, also by us. At the same time, the negative effects of low interest rates on financial stability are becoming increasingly visible.

The more positive picture at first sight in the United States also needs to be seen in more detail. Middle incomes of American citizens have been under pressure for some time. Well paid jobs are disappearing and being replaced by lower paid work. It is bizarre that a large part of the population in one of the world’s richest developed economies is gradually losing prosperity. Globalisation and the associated international distribution of labour offer the countries concerned huge benefits at the macro level, but at the individual company and employee level this can have detrimental consequences. In these cases, it is the government’s job to come up with a supportive policy that ensures that the necessary adjustments can be made as smoothly as possible. This has not happened in the US to a sufficient extent. The American dream of great opportunities and upward mobility for ordinary people has remained totally out of reach for many. This explains the huge dissatisfaction among large parts of the population that is expressed in the rise of Donald Trump and Bernie Sanders in the primary elections. The role of Trump is similar to that of Pim Fortuyn some time ago here in the Netherlands. He is mobilising the votes of a large group of people that have been very dissatisfied with the situation for a very long time and are now turning against the political establishment. It is clear that the Trump effect will continue whatever the outcome of the elections, and that the underlying problems will continue to demand attention (see this Economic Report).

Other risks such as the slowdown of growth in China, the political instability in the Middle East and the refugee problem that is partly related to this have meanwhile not diminished in importance. Overall, the situation looks bad: things are not going well and it looks as though they may get worse.

Everything becomes malleable under pressure

However, this conclusion is premature and too pessimistic. The current situation also offers positive opportunities. Since the problems identified above are of such seriousness and in many countries large parts of the population are threatening to express their anger in a vote against the existing political parties, they can no longer be ignored and solutions have to be found that can turn things in the right direction. There are also trends at work in the background that present big challenges, but also offer enormous potential.

To start with the first issue: regardless of the outcome the British referendum will result in a review of European cooperation. Even if the UK votes against a Brexit, a large minority will have voted against Europe. This will significantly increase pressure on the EU to reform, especially since dissatisfaction with the situation goes far beyond the boundaries of the UK. Despite the fact that cooperation has delivered many benefits, such as peace and security in Europe and a huge increase in prosperity, the EU will have to reinvent itself in certain respects. It has done this on several occasions in the past. European sclerosis in the early 1980s was followed by the creation and realisation of the Internal Market, and the currency volatility of the 1990s was followed by the Economic and Monetary Union. This time, the reinvention of Europe will have to entail a deepening of cooperation where this is lacking, but at the same time where possible and efficient this will have to be returned to the national level where the population wants this. The democratic nature of the EU has to be strengthened further. And, everything becomes malleable under pressure: now that it is clear that the possibilities available to the ECB are being exhausted, a greater emphasis on budgetary policy is inevitable. This will focus discussion on the agreements in the Stability and Growth Pact. One important cause of the lagging growth rate in the eurozone is that budgetary policy has continually been restrictive while monetary policy has aimed to provide stimulation. Not only because countries with budgetary problems have had no room to accommodate, also because countries that could have accommodated have not stepped up to the plate and taken responsibility. The agreements in the Stability and Growth Pact, however understandable they may be from a political point of view, have stood in the way of a convincing European recovery. The same observation applies to the prohibition of monetary financing by the ECB. Monetary financing is potentially a threat to financial stability. Prohibiting this is therefore sensible, other than in times of long-lasting low economic activity and deflation. In such a context the politically independent ECB should have the possibility of applying this powerful policy instrument. If Europe wants to move forward, it needs to review these policy agreements in order to achieve higher growth and faster creation of jobs. This is not simple politically, but it is not impossible either.

In the US, the voices of the large group of dissatisfied people can no longer be ignored. There is thus a strong possibility that policy will change to a direction that addresses this dissatisfaction. Not with protectionism, but for example through better access to education and a tax system that promotes a more balanced distribution of income.

Behind the slower growth in China, a transformation is in progress towards a new growth model that relies less on exports and investment and more on the services sector and consumer demand. This transition will not occur without shocks, but it represents a movement in the right direction. In future, China will also be a major sales market, also for Dutch exporters. The transition to a less strictly regulated balance of payments and a convertible and freely floating renminbi will eventually contribute to a more balanced global monetary system.

Separately from all the short-term developments, there are technological developments happening in the background that in the long term could turn out to be far more fundamental than the issues mentioned above. Robotisation will have a big impact on the labour market; the internet will disrupt existing retail business models; block chain technology could reform the banking system; making the economy more sustainable will present unprecedented opportunities for innovation and new earnings models. This is but a small selection from a much wider development. Technological progress is often destructive, because old models and technologies are destroyed. This means that there will always be resistance; the disadvantages of innovation are almost always the first to be recognised, and the benefits are only recognised much later. Nonetheless, innovation almost always leads to progress, in prosperity and in employment. There is no reason to think that things will be different this time.

The upward potential is there, also for the Netherlands

The global economy is going through turbulent and uncertain times. The challenges are big. But the solutions are there. Now that the possibilities for muddling through are being exhausted and the political pressure on policymakers is increasing, we can no longer avoid a decisive policy.

Table 1: Global growth expectations
Table 1: Global growth expectationsSource: Macrobond, Nigem, Rabobank

The developments in the global economy will not fail to affect us here in the Netherlands. The good news is that our economy is in good shape, with an excellent competitive position, strong government finances and a banking system that is better capitalised than ever before. The Netherlands is strong. We need to look beyond today’s risks and uncertainties to see that they already contain the seed of their solution. Big technological breakthroughs have always preceded long periods of increasing prosperity. Turbulence will probably continue to dominate in the coming years, but the main point is that the Netherlands and the rest of the EU should be at the forefront of the upward thermal of the coming wave of innovation. This will offer unprecedented upward potential.

Wim Boonstra
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 5128 1405

naar boven