Global growth: from “secular stagnation” to “new mediocre”

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Julien Moussavi is analyst within the strategy and economic research team at Amundi. Nature of global economy has changed, he spots.

According to the IMF, global growth will be moderate and uneven in 2015-2016.

In its latest “World Economic Outlook,” published on 14 April 2015, the IMF maintained its global growth forecast at +3.5% in 2015 (+3.8% in 2016) but behind this status quo are some very uneven forecasts depending on country and region.

Indeed, the Fund foresees an increase in growth for the advanced countries (+2.4% in 2015 and 2016 after +1.8% in 2014), while the emerging countries should see their prospects diminish in 2015 (+4.3%), coming back to +4.7% in 2016 after +4.6% in 2014. Several complex forces determine the global economic outlook.

In most of the advanced countries, the expectations of weaker potential growth and lower inflation are weighing down current investment, which is why long-term bond yields keep falling and are now at an all-time low for many of the advanced countries.

For the emerging countries, growth has been an unending disappointment, and potential growth is starting to show some signs of weakness.

In addition, some countries – both advanced and emerging – are still suffering the repercussions of the Great Recession (output gaps still negative, high debt ratio, etc.).

Big swings in exchange rates and oil prices are benefiting some, but not others

The decline in oil prices, which is due mainly to a steady increase in supply, to a change in OPEC strategy as well as the Chinese slowdown which is more abrupt than expected, is stimulating growth for the oil-importing and/or oil-consuming advanced countries.

The US, the eurozone and Japan should benefit from the low oil prices. But the exporting emerging countries will suffer. The changes in exchange rate for the main advanced countries reflect divergent monetary policies.

The US remain in the idea to raise the fed funds rate this year, while the eurozone and Japan have no prospects of their monetary policy normalising any time soon.

Depreciation of the euro and the yen will facilitate the recovery in the eurozone and Japan, while the US will have to offset the negative effects of the dollar’s appreciation.

The “new mediocre” begins.

Many economists are talking about “secular stagnation” to describe the world economy’s current situation, i.e., an extended period of low growth.

The IMF – in the words of its managing director Christine Lagarde – speaks, more politically of the “new mediocre,” stressing that this year, like the past two years, global growth will remain near +3.5%, more or less the same average growth rate of the last two decades.

However, the nature of that growth has changed: no longer is it creating enough jobs or stimulating enough productivity. In addition, the emerging countries have the potential to grow at a faster pace, but are not doing so, often because of political problems and/or structural hindrances weighing down supply.

Ultimately, the global economy begins to enter into the “new mediocre” era. This calls for finding ways to correct this trend to come back to the paths of more balanced growth.

No other outcome than the difficult search for an appropriate policy mix (a combination of monetary, budgetary, and especially structural measures), whatever the political constraints (or others) that impede.

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