ONE of the most significant conundrums confronting economists and policy makers since the global financial crisis, now some eight years ago, is why the massive injections of liquidity by their central banks, in the US, Europe, Japan and China, in particular, didn’t stimulate more economic growth, and especially business investment.
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Indeed, most ‘monetarists’ would also have expected that such a liquidity explosion, and sustained near zero (indeed in many cases negative) interest rates, would soon have caused runaway inflation.
Yet, global growth is still weak, and being consistently downgraded by global forecasters. World trade is as flat as it’s been since the GFC, and there are serious threats of deflation in several major economies.
Moreover, monetary authorities have virtually run out of capacity to attempt to further stimulate their economies. Indeed, the European Central Bank, having recently committed to maintaining its attempt to inject liquidity into the European economy, seems to be running out of securities to buy for such a strategy.
In a similar vein, our Reserve Bank has recently admitted limits to its capacity to stimulate our economy, against questions about the sustainability of our growth, in a flat global world, and our inflation rate still below the bottom of the Bank’s target range.
The core inflation numbers released this week for the September quarter, while a little below market expectations, were consistent with the RBA’s forecasts, and so are generally seen as suggesting that the RBA will not cut the official cash rate again when it meets on Melbourne Cup Day – now only about a 4 percent probability.
When you recognise the seasonality in this week’s inflation numbers, especially the weather-driven (floods) increases in fruit (+19.5 percent) and vegetable prices (+5.7 percent), that dominated the outcome, along with increases in electricity (+5.4 percent) and tobacco (+2.8 percent) prices, there is little to suggest that underlying inflation is actually ticking up.
So, as much as the Government likes to talk up the strength of our economy, we actually sit in very difficult circumstances, given the risks to the global economic outlook, and the magnitude and urgency of our Budget repair task. The latter should see fiscal tightening via further cuts in expenditure and tax increases, meaning that the government sector will be a drag on our future growth, with business investment and consumer spending remaining subdued.
Although our overall measured growth numbers might remain okay for a time, due to some stronger export performance, this too could be constrained in time if world growth and trade remain as flat as seems likely.
The only effective way out of this conundrum is broad-based structural reform, across most major areas of policy, designed to significantly increase our national productivity.
Yet, in a world where the politics of fear has replaced the politics of courage, and where our political leaders are self-absorbed in an almost daily media game to simply score political points off each other, it is very hard to see them embracing such a reform agenda.
The likely result, as some economists are now admitting, is ‘secular stagnation’, where global growth remains weak for a decade or so, with serious bouts of instability in financial markets, as economic events and geo-political tensions unfold.
