Faced with a persistent shortage of demand, rich countries need to increase public expenditure, raise wages and boost demand in order to revive their economies and put them on a stable growth path, the UNCTAD Trade and Development Report, 20151 says.
As the report notes, the phenomenon of “secular stagnation” – advanced economies experiencing a long-term slowdown in economic growth unrelated to normal economic cycles – has returned to the spotlight. There has been insufficient acknowledgement, however, that the big forces in play, constraining consumer demand and negatively affecting private investment, are the decline in the wage share (by about 10 percentage points on average since the 1980s) and widening income inequality.
As the report says, growth in the global economy for 2015 is expected to remain more or less unchanged from last year, at 2.5 per cent, reflecting a slight acceleration in developed economies, a moderate deceleration in developing economies and a more severe decline in economies in transition. This is significantly below the 4 per cent average of the pre-crisis years.
The failure of growth in many developed countries to regain its pre-crisis momentum, despite several years of accommodative monetary policy, has created what UNCTAD calls a “new abnormal”. In today’s overly-financialized world, stimulating the economy relies unduly on mounting debt and asset bubbles, with countries facing a difficult trade-off between prolonged subdued growth and financial stability. According to UNCTAD Secretary-General Mukhisa Kituyi, “eight years following the financial crisis, the world has clearly not found how to shift gears for global inclusive and sustainable economic development”.
In contrast, the report says that increases in public expenditure, such as on infrastructure, have been shown to have very substantial positive multiplier effects in stagnating economies, so public investment should be a key instrument for addressing the so-called secular stagnation now being seen in developed countries.
In addition, a progressive incomes policy increases demand, creating outlets for private investment and resulting in wider benefits, the report contends. Higher wage incomes reduce the financial pressure on pension schemes and allow households to increase their consumption spending without adding to household debt. There is also evidence of increased levels of activity and employment fostering productivity growth, creating a virtuous circle of expansion of demand and supply.
By mid-2014, a sense of “business as usual” had returned to policy circles in developed countries. Projected growth rates were edging up, the eurozone was back in positive territory and Japan seemed poised to pull itself out of years of economic stagnation.
Meanwhile, unemployment in the United States of America was falling, and the Federal Reserve was progressively ending quantitative easing; oil prices were dropping and business confidence was on the mend.
The UNCTAD report expects developed countries to grow at around 1.9 per cent in 2015, compared with 1.6 per cent in 2014. This is due to stronger domestic demand, with household consumption boosted by lower energy prices and higher house and equity prices. Employment growth in some countries (notably Germany, Japan, the United Kingdom of Great Britain and Northern Ireland and the United States) has also helped.
Monetary policies remain expansionary, with very low interest rates in all developed regions and additional quantitative easing programmes launched in the eurozone and in Japan. Even so, inflation is expected to remain below targeted rates in most developed countries, in part because bank credit has stalled and wages remain subdued.
None of these factors look like robust growth drivers and warning signs have begun flashing over the summer months of 2015.
Doubts remain, in particular, over the strength of the European and Japanese recoveries. Even in the United States, where the post-crisis recovery looks most solid, household balance sheets remain fragile and the appreciating dollar is hurting the contribution of net exports to gross domestic product growth. Such concerns appear to have contributed to the Federal Reserve’s decision to not begin “normalizing” interest rates yet.
The singular reliance on expansionary monetary policies to address the demand shortfall has led firms to use their profits for dividend distribution and investment in financial assets, rather than for production facilities.
Similarly, balanced recovery, according to the UNCTAD report, cannot be achieved by exclusively relying on “structural reforms” aimed at correcting rigidities in product and labour markets and improving international competitiveness. World trade remains in the doldrums. Exports cannot contribute to a generalized recovery without a robust expansion of global demand, and in particular a willingness by surplus countries to do more.
Between 2012 and 2014, world merchandise trade grew between 2 and 2.5 per cent (very similar to the rates of global output). These growth rates are significantly below the average annual rate of 7.2 per cent recorded during the 2003–2007 pre-crisis period.
In 2014, world merchandise trade, at current prices, remained almost stagnant (growing only by 0.3 per cent) due to the significant fall in prices of major commodities. Preliminary estimates for 2015 indicate a mild increase in the volume of merchandise trade, which could grow at a rate close to that of global output.
If secular stagnation originates on the demand side, containing labour income and reducing public spending could worsen rather than solve the problem, the report concludes.
Report: http://unctad.org/en/PublicationsLibrary/tdr2015_en.pdf
Overview: http://unctad.org/en/PublicationsLibrary/tdr2015overview_en.pdf
