Do you sometimes feel that things are not as good, or going as well, as you are being told? Of course, this happens all the time with statements by our politicians who usually exaggerate, and who just accentuate the positive, and mostly ignore the negative.
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Recently I have been concerned by a distinct shift in sentiment in financial markets. We are being told that we are now experiencing “synchronized economic growth” in the developed world, as recent growth numbers have picked up a bit, and as many economic forecasts of growth are being revised upwards, although only by a couple of decimal points, but unlikely to be sustained. Stock markets, particularly in the US, are now regularly reaching new records. The reality is that the US economy has been recording steady but underwhelming growth since the recession of 2007-9. The IMF now expects that it will expand by 2.7 per cent in 2018, an upward revision from the 2.3 per cent the Fund forecast just last October, but slowing to 2.5per cent in 2019. Although the US has seen a very strong jobs market, reaching close to full employment, these growth numbers are still well short of pre-GFC rates.
A key reason for the shift in market sentiment and the upward revision of growth numbers is the expected “sugar hit” from the Trump tax cuts, a $1.5 trillion overhaul. However, these tax cuts are “unfunded” and being introduced when the US Budget deficit is already some 3.5per cent of GDP, and debt approaching 110 per cent of GDP. The current assessments ignore the view of the independent Congressional Budget Office, pre-Trump, last year, warning US debt could reach some 150 per cent of GDP over the next 30 years, far exceeding the record level just after World War II, unless tax and spending laws are changed.
While the IMF lifted its growth forecasts, which grabbed the headlines, it also pointed to the “troubling” increase in debt levels across many countries, and warned policymakers against complacency, saying now was the time to address structural deficiencies in their economies. This is unlikely to happen in today’s global, short-term focused, populous, political environment. Indeed, any objective assessment of financial markets today would be concerned that they are already at least as “stretched” as they were before the GFC, but with monetary and budgetary authorities now having little capacity to respond to another crisis.
We have had some nine years of “emergency money” injected into the global economy, luring many countries into debt dependency, with little or no attempts to address the structural disorders that produced the crisis. Not only have we seen disturbing accumulations of debts, with the IMF estimating that global debt ratios have surged some 51 percentage points since the Lehman crisis, reaching some 327 per cent of GDP, but there has also been a degradation in credit quality, with some extreme “anomalies”, such as “junk bonds in Europe “cheaper” than US Treasuries. There are many financial market bubbles to “burst”, and corrections, especially in bond markets, and then stock markets, may be the result of the US Fed, with other central banks following, raising interest rates, and attempting to correct their bloated balance sheets. While central banks want to “normalise” interest rates, and rebuild their capacity to handle another crisis, ironically they have very little scope to do so without themselves precipitating another crisis. These are unchartered waters. Recent “effervescence” in financial markets may be very short lived.
