Every sales pitch has a narrative, but the current narratives for economic growth have pestered out and there is no compelling one for the future.
The current growth narratives are central bank stimulus, emerging markets, energy, and consumer spending.
Central bank stimulus, which consists of printing money and reducing interest rates, has stabilized the U.S. economy and improved liquidity. But it has not resulted in robust growth. It also caused a misallocation of capital. For example, some capital went to refinancing corporate loans, mergers and acquisitions, and stock buy backs, all of which is good for business but not good for economic growth and jobs.
Hope for sustained growth in emerging markets, namely BRICS (Brazil, Russia, India, China, and South Africa) has been replaced with fear that their shrinking economies will pull the rest of the world into recession.
With financial re-engineering opportunities exhausted and little demand for loans, stimulus dollars found their way to emerging markets. Investments to expand capacity initially led to economic growth, but with a weak global economy, there was little demand for additional commodities.
Brazil and Russia are in free fall, China is in a significant slowdown, and there is trouble brewing in South Africa. As a result, there have been massive outflows of that misallocated capital, which in turn has exacerbated their slowing economies.
The energy sector got a big boost from investment. That ended up significantly increasing supply, especially oil and gas. But coupled with a slowing global economy that needs less energy, the result has been an energy glut and a collapse of energy prices. It will be hard for energy companies to pay back loans and investors to make any returns for the foreseeable future.
And there was much hope that consumer spending would lift the global economy. But U.S. consumer demand, which accounts from roughly two thirds of the economy, has had only a modest recovery. This is because wages have been stagnant. And the new jobs being created are mostly low paying service and hospitality sector jobs and the jobs that are being lost are the high paying manufacturing ones.
What is surprising is that there is no compelling story about a new engine to drive growth.
There are three that are making the rounds now, but not gaining much of a following.
The first is that the economy is much better than what all the bad data suggests. In the U.S., with job growth slowing and inflation bordering on deflation, the Federal Reserve states that it still believes the economy will come roaring back in the fourth quarter and thus raising rates is still on the table for this year. The Bank of Japan recently said the same thing about their moribund economy. Non-factual optimism is not a compelling growth narrative.
The second is that the economy is bad and getting worse and that will compel governments to initiate even more stimulus, not less. When the recent jobs report significantly fell short, stocks shot up assuming that the bad news would compel the Federal Reserve to hold off raising rates or even start a fourth round of quantitative easing. Bad news is really good news might be twisting logic but is not a compelling growth narrative.
The third is that this mediocre growth is the best it will ever be. Secular stagnation is here to stay because of falling population growth and lack of technological innovations that improve productivity. Maybe, but hardly a compelling growth narrative.
This lack of a new growth narrative points to one unsettling future. On the side of optimism: modest and fragile U.S. economic growth amid weak global growth. On the side of pessimism: declines in global economic growth and fears of deflation become real possibilities.
Categorised in: News