Last week was a good one for global economic rebalancing, or so it seems at first sight.
Encouraging data from several countries point to a global economy that is operating on more cylinders and, therefore, growing in a more balanced fashion. Yet the manner in which this is being achieved, together with a still-inadequate overall level of global activity, are concerns. With the crisis in Ukraine also raising the stakes, the Group of 20 needs to work even harder to deliver on its innovative growth commitment.
Let us start with two important bits of good news from last week’s data releases.
First, the numbers out of Europe and the US suggest that activity is picking up among recent growth laggards in the global economy. You can see this most clearly in Europe’s industrial production (including what is now a robust 8.6 per cent year-on-year expansion in Germany). Overall, eurozone growth for this year is now likely to accelerate to the 1-1.5 per cent range, or a lot more than what was cumulatively achieved in the 2011-13 period. No wonder Mario Draghi, the highly respected and effective president of the European Central Bank, declared on Thursday that the eurozone was now “an island of stability”.
In the US, Friday’s better than expected employment creation data interrupted a string of less encouraging economic indicators. Meanwhile, the detailed economic assessment provided by the Federal Reserve’s Beige Book survey suggested that quite a bit of the recent economic slowdown was the result of freezing weather conditions and, therefore, reversible.
The second bit of good news came from the faster-growing economies whose trajectory is clouded by concerns about potential financial instabilities. Whether it is the Chinese authorities’ affirmation of 7.5 per cent growth for 2014 or previous concerns about slowing growth and/or rising inflation elsewhere, recent indicators increase the probability of an orderly soft-landing.
All of which lends support to the critical (and, until now, frustratingly-elusive) transition for the global economy: that from experimental policy-induced growth to the genuine and truly sustainable variety.
Yet not all is well on the global rebalancing side. The overall level of global growth remains inadequate – particularly when measured in terms of what is needed to overcome worrisome unemployment problems, persistent debt overhangs and the trio of excessive inequalities (income, wealth and opportunities).
It is not just a problem of inadequate aggregation. Details behind some of last week’s numbers remain troubling. For example, there was no real sign of a material alleviation in problems that are becoming more deeply embedded in the structure of economies – and therefore much harder to solve (such as long-term unemployment). And still too much of the economic expansion is coming from attempts to reinvigorate old-exhausted growth formulas rather than a determined transition to more promising ones.
All of this speaks to the importance of quickly following up on the recent G20 meeting, particularly the bold commitment to bolster growth by 2 per cent above the current growth trends. But there are few signs of this happening. Instead, the focus of the multilateral dialogue has shifted to Ukraine. Concurrently, the probability of multilateral agreement on virtually any substantive issue has been severely hampered .
Unfortunately, there is little to suggest that either the G20 commitment or recent data would serve as a springboard for a truly transformational approach to solving the global growth, employment and inequality challenges. Instead, and to use a simple analogy, policy makers find themselves in a position that, I suspect, many of us may encounter as we transition through the different stages of using a tube of toothpaste.
With a relatively full tube, little thought is given to how much toothpaste is wasted. But as the tube empties, we are more likely to recognise the cost of having squandered earlier opportunities to modify behaviours consistent with longer-term benefits. And the regret is greatest when it becomes extremely difficult to squeeze any incremental bit of toothpaste out of an exhausted tube.
While they have already missed several reform opportunities, global policy makers still have toothpaste left in their policy tube. That is good news. The question is whether the combination of the Ukrainian crisis and excessive comfort with the better economic data will obfuscate the need for the longer-term policy adjustment. I suspect they will, contributing to policy regrets down the road.
The writer is the outgoing chief executive and co-chief investment officer of Pimco