2014: Renewed Economic Growth or Financial Crash?

Your instincts may be telling you otherwise, but the global economy will be strengthening in 2014, according to two major reports released in recent weeks.

In an improvement over 2013’s global economic growth of 2.1 percent, we will see a 3 percent rise this year and a bump up to 3.3 percent in 2015, predicts the United Nations’ World Economic Situation and Prospects 2014 report.

This positive news is echoed in the slightly more optimistic Global Economic Prospects report issued by the World Bank this week that states:

“Global GDP is projected to grow from 2.4 percent in 2013 to 3.2 percent this year, stabilizing at 3.4 percent and 3.5 percent in 2015 and 2016, respectively, with much of the initial acceleration reflecting a pick-up in high-income economies.”

At the same time, the World Bank projects that developing country growth will rise above 5 percent in 2014, with China’s economy growing by 7.7 percent, India’s by 6.2 percent, Mexico’s 3.4 and Brazil’s 2.4 percent.

Global economy: the patient shows signs of recovery

The UN report reads very much like the medical examination results for a sick patient who has had to take some pretty strong medicine, but while still looking rather pale and tired, is showing some signs of recovery.

Inflation (like high blood pressure) remains benign worldwide, the report states. It has decelerated in the United States and euro-zone, dropping to 2 percent in the former, and 1 percent in the latter. This is causing concerns from the International Monetary Fund that we could be entering a period of deflation (overly low blood pressure) and that could undermine the global recovery.

In the developing world, inflation rates are above “10 percent in only about a dozen countries scattered throughout different regions”, according to the UN report, and that is arguably a good thing.

High unemployment is part of the explanation for the lower inflation figures and unemployment rates remain a serious challenge, particularly for the euro zone where they reached record levels at 12.2 percent in 2013, but as high as 27 percent in Greece and Spain. Renewed GDP growth in 2014 is projected to bring reductions in these rates in both Europe and the US, with the latter dropping below 7 percent. Again, a very good development, if it happens.

There are, however, major concerns for developing and emerging economies highlighted in the UN report. First, there has been a measurable decline in private capital inflows to “emerging markets, a sub-group of developing countries”. Second, volatility in these markets has increased with equity market sell-offs and local currency depreciation.

Risk and uncertainties: It could all go very badly wrong

While delivering these positive forecasts, the UN and the World Bank devote half of their respective press releases to the risks and uncertainties facing the global economy.

The Chief Economist at the World Bank, Kaushik Basu, suggests that “one does not have to be especially astute to see that there are dangers that lurk beneath the surface”. Over at the UN, Shamshad Akhtar, Assistant Secretary-General for Economic Development, claims that “uncertainties and risk coming from possible policy missteps as well as non-economic factors … could stymie economic growth”. By non-economic factors she is referring to the situation in Syria and the Middle East.

By far the biggest concern is the potential impact of the US Federal Reserve’s exit from the quantitative easing programmes. The aim of these programmes is to “inject money into the economy in order to review nominal spending”. This involves “purchasing financial assets from the private sector” using “new central bank money, in addition to boosting the amount of central bank money held by banks…”.

The problem is one of weaning the economy off these programmes with one danger being that the medicine itself could become a form of poison for the global economy. Rather than using the term weaning, the Federal Reserve talks about “tapering”, with the goal being to reduce the monthly amount of quantitative easing in the US, to gradually wind it down and to conclude their programme at the end of 2014.

The authors of the UN report are concerned, however, that tapering could lead to “a sell-off in global equity markets, a sharp decline in capital inflows to emerging economies and a spike in the risk premium for external financing in emerging economies”.

Andrew Burns at the World Bank argues that this decline in capital inflows to developing countries could fall by as much as 50 percent for several months “provoking a crisis in some of the more vulnerable economies”, specifically Brazil, Turkey, India and Indonesia.

Meanwhile, the UN report points to other risks including “fragility in the banking system and the real economy in the euro area and the continued political wrangling in the US on the debt ceiling and the budget”.

Neither the World Bank nor the UN consider that a crisis is inevitable but they do call for strengthened international policy coordination, renewed reform of the financial system and in some instances the tightening of fiscal policies.

Déjà vu – Feels like 2007/8 all over again

Reading these reports, I am reminded of the situation back in 2007/8 when we first began work on the Our World magazine. At that time, I became aware of signals among noise about the state of the global economy when the era of cheap energy is over and decided that the magazine should focus on some of the major issues facing the world. One of those issues was the peaking of global conventional oil production.

So in 2007 we began working on the magazine and successfully launched at the beginning of July 2008, just before oil prices peaked at around US$147 per barrel. At the same time, the financial system was just beginning to unravel and a serious collapse looked imminent. Fortunately for us, the global leaders managed to rally around the problem and prevent the world from slipping into depression.

Now, I have that 2007/8 feeling all over again and you probably share it. Particularly, I am struck by a number of signals from financial commentators like Peter Schiff, author of The Real Crash, and Robert Wiedemer, author of Aftershock, who are warning that a second financial crash is just around the corner for the US.

They made similar predictions before the 2008 financial crash and you could argue that they are in the “economic collapse prediction business”, since they also offer their services as investment advisors. Their basic message is that you should try to save yourself and your money in difficult economic times, and if you buy their books you will know what to invest in and what to avoid.

It would be all too easy to dismiss these pundits were it not for the fact that the UN and World Bank reports mentioned above appear so cautious about their growth projections and about the fragile nature of the economic recovery. It is almost as if they are covering their options so that they can say, if things go wrong, “we did try to warn you about the risks we are currently facing”.

The question is whether our leaders are aware of these risks or blind to them.

Risk Blindness and the Road to Renaissance

Coincidentally, I have just finished reading the most recent book from Jeremy Leggett – The Energy of Nations: Risk Blindness and the Road to Renaissance. Leggett describes himself as a “social entrepreneur” and is the founder of a renewable energy company, SolarCentury. He maintains a blog called the Triple Crunch Log that covers the interaction between energy, climate and the financial crisis.

Using the log, which tracks events as far back as 2006, Leggett’s book presents a blow-by-blow chronological account of how these three factors have played out in the past seven years.

In the United Kingdom he appears to be viewed by politicians, government officials and the major energy companies as the acceptable face of the environment, climate and/or peak oil community. As he puts it, he is a pinstripe suited, Financial Times carrying, climate change and peak oil concerned capitalist.

In his book, he describes numerous meetings where he interacts with the British government and Big Energy, often behind closed doors. In some instances, his accounts of those interactions read like episodes from Armando Iannucci’s dark political comedy, The Thick of It shown on the BBC.

Here is one example. A group of concerned business leaders representing the UK Industry Taskforce on Peak Oil and Energy Security (that Leggett helped set up) meet with the Secretary of State for Energy and Climate Change. Together they agree on a proposal for the government to work with the Taskforce to develop an oil shock emergency response plan. Subsequently, the business leaders issue a press release to announce the collaboration, only to find limited media coverage. They then discover that the civil servants in the Ministry had been informing the press that no such agreement was ever made. It would be a hilarious episode of The Thick of It, were it not actually true (check it out in the book).

What Leggett describes in his dealings with our leaders in government and the energy sector is a tendency towards “risk blindness” around climate, energy and the financial concerns. He suggests that this tendency will push us towards a financial collapse in the next few years. On the energy front, he sticks to his earlier prediction of an energy crash by 2015.

Leggett points out that many financial commentators believe a second financial crash is imminent. “The weight of debt that we have allowed to accumulate around the world will prove just too heavy for the financial system,” he writes in his book. “As things stand, a seemingly small event holds the potential to trigger the mass failure of banks.”

One such event could be the private equity decline mentioned in the above reports. We have to acknowledge the important role the UN and the World Bank are playing in outlining the risks so clearly and can only hope that the leaders of the world are not blind to them. Leggett, however, suggests that the problems are more profound than even the UN and World Bank officials are willing to admit.

He believes that the next financial crash will result in society realizing that “modern financial institutions cannot in general be trusted with either individuals’ money or the provision of financial services to viable economies”. He further argues that “light touch regulation” of the financial system no longer works. To get us through the next crisis, we are going to need, he explains, a critical mass of “presidents and prime ministers keen to sit constructively in a multilateral emergency room”.

But Leggett is an optimist. With crisis comes opportunity and Leggett would like to see that the road forward takes us to a renaissance based on people power, community interests and the explosive growth of clean energy. In this context, The Energy of Nations is essential reading for those concerned with the interaction of the pressing global issues of today.

If the caution expressed in the UN and World Bank reports is correct then we find ourselves in a time of great risks and uncertainty. If the financial pundits are right then an economic catastrophe lies just ahead. If risk aware business leaders like Jeremy Leggett are making reliable observations then we have “arrived irredeemably in a time of consequences”.

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2014: Renewed Economic Growth or Financial Crash? by Brendan Barrett is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

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Author

Brendan Barrett

Brendan Barrett joined the United Nations University in 1997. His professional career includes work in the private sector, academia and with international organizations. He uses the web and information technologies as a means to communicate, teach and undertake research on issues of environment and human security.

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  • http://www.ourworld.unu.edu/ Carol S

    Very thought-provoking stuff, Brendan. And indeed, oil supply (and its impacts) talk of late is worrying, as evidenced with a couple of reports today: US Army colonel: world is sleepwalking to a global energy crisis and Shell’s profit warning linked to cost of drilling in Arctic waters.

  • AlanZulch

    Thought provoking, for sure. Whenever I read reports of improved economic conditions I can’t help but think that regardless of how well the performance is going on the global stage, the stage itself is rapidly and inexorably becoming part of the drama. Our human project takes place – performs – within this incredibly thin biospheric band, and until recently we have all but completely taken it for granted that this band will continue to support us, while we learned to extract from above and below in quantities only limited by ingenuity.

    Now, it is shocking – shocking! – that the earth and its limits are intruding on our story of progress. We are nothing if not entitled beings, us of the modernist worldview.

    Now that the climate is changing and resources dwindling and pollution mounting, the natural stage upon which we act out our mythic entitlement is gathering its resistance. Where I live in California, drought is hardening its grip, and if continues the techno-savants among us here in the Silicon Valley will be in for a rude awakening because the promised Singularity has not arrived soon enough to provide escape into the rational ethers. And so it goes with variations on a theme in many corners of the ‘Global North’.

    Sigh..our story is obsolete, but we insist on continuing to tell it. Endless economic growth is an illusion in this finite world – as is so much related dogma – but tell that to those of us whose livelihoods depend on it. I’ve got my 401K and car and house and computer. I know the dilemma first-hand.

    May we live only in a ‘Constrained Economy’, because the alternative may be darker indeed.

  • BrendanBarrett

    Carol and Alan, Thanks so much for your comments. I feel that it is important to look beneath the projections for economic growth, just as we do for any models and predictions, including those for climate change. However, I am struck by the risks and uncertainties outlined in the reports from both the World Bank and the UN. Clearly, we have some pretty fundamental problems that need to be sorted and I fear that we are all currently in the mode of “waiting for the next crisis.” While some are deeply worried about the possibility of a second major crash, others look to it as an opportunity to profit, if you invest wisely. I find that bizarre.

    Carol, the two reports that you mentioned are indicative of the “creeping problem” which is our global energy supply. It appears that the shale gas revolution may be nothing more than a bubble and that it may delay the peak in oil production by a matter of years rather than decades as Leggett suggests. At the same time, there are so many other interrelated factors that could trigger an economic crisis in the near future. You could argue that the US economy, for instance, has been on life support (quantitative easing) since the last financial crisis. Clearly, the Federal Reserve would like to gradually remove this, but can’t. That is not a good sign.

    In the longer term, as you point out Alan, we have other major challenges that the brightest minds need to address (and not just how to hold up our banking system) such as climate change, energy and food security, biodiversity loss, and so on. In some quarters, we hear that the nations of the world have to shift from the pursuit of GDP growth at all costs, to another paradigm that focus on prosperity without growth, to quote the ecological economist, Tim Jackson. But we better get a move on.

  • BrendanBarrett

    There is an interesting article in the Guardian today that echoes the above. http://www.theguardian.com/business/economics-blog/2014/jan/20/next-financial-crisis-here-soon-history

  • ErwinBrunio

    I read somewhere that we should be developing sustainability rather than sustainable development. With our focus on growth, perhaps we are just making our patient getting more sick? Just a scenario for us to prepare, is it time to “allow” the economy to go bust and re-adjust again?

  • Patrik Gotz

    Technical quibble: Could you please change the font type or font color to black rather than grey? The low contrast is straining to the eye, so for instance the comments section is much more pleasant to read than the main text. Thanks!

    As for the content, nice review of very important topic. I am just little skeptical about the word “renaissance”, as it is overused in so many contexts, e.g. “nuclear renaissance”…

  • BrendanBarrett

    Thanks for all the comments so far. I was very interested today to see Martin Kohr jump into the fray on this topic over at the Triple Crisis website. His article is titled “Is a New Economic Crisis at Hand?” http://triplecrisis.com/is-a-new-economic-crisis-at-hand/

    His comments reinforce the points made by both the UN and the World Bank, and as I outlined in my article. He states:

    “At the end of last week, several developing countries saw sharp falls in their currency as well as stock market values, prompting the question of whether it is the start of a wider economic crisis.”

    A fundamental problem is the “boom-bust cycle of capital flows to and from the developing countries, coming from monetary policies of developed countries and the investment behaviour of their investment funds.”

    Also, in 2013, “capital inflows to developing countries weakened due to the European crisis and the prospect of the US Fed “tapering” or reducing its monthly bond purchases.”

    Seems the next couple of weeks are going to be critical is “seeing whether the situation deteriorates or stabilizes.”

    AT
    the end of last week, several developing countries saw sharp falls in
    their currency as well as stock market values, prompting the question of
    whether it is the start of a wider economic crisis. – See more at:
    http://triplecrisis.com/is-a-new-economic-crisis-at-hand/#sthash.XYFF1K9o.dpuf
    AT
    the end of last week, several developing countries saw sharp falls in
    their currency as well as stock market values, prompting the question of
    whether it is the start of a wider economic crisis. – See more at:
    http://triplecrisis.com/is-a-new-economic-crisis-at-hand/#sthash.XYFF1K9o.dpuf
    AT
    the end of last week, several developing countries saw sharp falls in
    their currency as well as stock market values, prompting the question of
    whether it is the start of a wider economic crisis. – See more at:
    http://triplecrisis.com/is-a-new-economic-crisis-at-hand/#sthash.XYFF1K9o.dpuf
    AT
    the end of last week, several developing countries saw sharp falls in
    their currency as well as stock market values, prompting the question of
    whether it is the start of a wider economic crisis. – See more at:
    http://triplecrisis.com/is-a-new-economic-crisis-at-hand/#sthash.XYFF1K9o.dpuf

  • BrendanBarrett

    Interesting article from Kochi Hamada, special advisor to the Abe administration in Japan – “Who’s Afraid of Tapering?”

    His basic argument seems to be that we shouldn’t blame the Fed Reserve for the impacts of tapering but rather that those countries affected have the tools they need to respond effectively. He argues that:

    “The reality is that, under a flexible exchange-rate regime, competitive devaluations do not produce undesirable imbalances. On the contrary, they can bolster recovery in participating economies.”
    Read more at http://www.project-syndicate.org/commentary/koichi-hamada-makes-the-case-that-concerns-about-the-fed-s-exit-from-quantitative-easing-are-unfounded#Zu5sxkgHDkWCAig6.99

    The example he gives is a 1984 paper from Jeffrey Sachs et. al. arguing that currency depreciation was the key to recovery after the Great Depression in the 1930s.

    I guess time will tell if history will repeat itself in this instance.

  • BrendanBarrett

    An interesting article from the BBC today.

    “The global economy could be heading for years of “sub-par growth”, according to the head of the International Monetary Fund (IMF).
    Christine Lagarde warned that without “brave action” the world could fall into a “low growth trap”.

    http://www.bbc.com/news/business-26861903

    Interesting use of terminology – sub-par growth, low growth trap.

    Something to pay close attention to.