This week’s annual meeting of global central bankers at Jackson Hole comes at a time when investors are beginning to question the wisdom of ongoing extreme monetary stimulus. Contrary to many critics, however, my concern is not that these measures have not worked. Instead, I maintain they’re simply not needed, as the global economy is as good as might be expected once allowance is made for slowing potential growth and falling commodity prices. To my mind, the far bigger global risk now is the impact of persistent misguided extreme monetary measures on financial stability.
Global growth has been OK
Global economic growth in recent years has been commonly perceived as disappointing, which in turn has been attributed to the scale of the financial shock endured in 2008. Indeed, focusing on developed economies – which are most responsible for today’s extreme monetary measures – annual GDP growth among members of the Organisation for Economic Cooperation and Development (OECD) averaged 1.7% p.a. in the five years to end-2015, compared with 2.8% p.a. in the 5 years to end-2007.
Yet around half of this growth slowdown has reflected a slowing in working-age population growth (from 0.8% p.a. to 0.2% p.a.), with the other half reflecting weaker growth in GDP per working-age person (i.e weak productivity). In other words, most of the slowdown in growth among developed economies since the financial crisis has reflected weaker potential growth.
Indeed, as seen in the chart below, economic growth across the developed world in recent years appears to have been above potential, as evident from the fact that unemployment rates have trended down. The unemployment rate averaged across the OECD has declined from a peak of 10.4% in the March quarter of 2010 to 6.4% by the March quarter of 2016. Only in Europe is the unemployment rate still clearly above pre-financial crisis lows, but it has also still fallen notably in recent years.
UNEMPLOYMENT RATES IN SELECTED OECD ECONOMIES
Even the Reserve Bank of Australia has acknowledged decent growth in the developed world, noting in its August Statement on Monetary Policy “labour market conditions in most advanced economies have continued to improve and a number of these economies are close to full employment.” Crisis, what crisis?
Global inflation is not perilously low
As seen in the chart below, headline consumer price inflation across the OECD is relatively low at present, with prices up 0.9% in the 12 months to end-June 2016 – compared with an average since 2004 of 2.1% p.a.. But most of this drop in inflation reflects the decline in commodity prices in recent years. Indeed, in the year to end-June 2016, core OECD consumer prices (i.e excluding food and energy prices) were up 1.8% – equal to their (relatively stable) average since 2004.
In the case of the Euro-zone, growth has also been above potential, though the unemployment rate across the region still appears elevated compared to pre-financial crisis levels. It’s also the case that core inflation in the Euro-zone is below average. In this regard, Europe seems to warrant somewhat more monetary stimulus than that of Japan and the United States, but even in Europe the case for extreme monetary measures seems weak – in view of the fact that unempoyment is trending down, and because core inflation is both still comfortably above zero (at 0.9% in the year to June 2016) and only modestly below its 1.4% p.a. average since 2004.
Financial instability is the biggest risk
We’re heading the wrong way and it’s time to turn back.