The outlook for the global economy is troubling. In the words of the former president of the World Bank Group, David Malpass, it is “facing dangerously slow growth of 2% or lower. I worry that slow growth may persist for years.” This from an impressive opinion piece in a recent Wall Street Journal..The bank recently forecast global growth this year of 2.1% and 2.4% in 2024; the IMF 2.8% and 3% respectively. Most of the dynamics are negative, including the obvious — aging demographics, inflation, growing government debt, the breakdown of trust and trade arrangements between and among countries and in my view, a dearth of sound political and economic leadership. China is reducing interest rates, the EU increasing them, and the US is on pause — a global economy “out of sync” according to a recent WSJ headline..First, inflation. The debate changed as central bankers have long since accepted current inflation is not “transitory.” A question is what has caused the highest inflation since the 1980s — government stimulus or pandemic related disruptions? Ben Bernanke, former chair of the Federal Reserve Bank, and Olivier Blanchard, former chief economist of the International Monetary Fund, conducted a joint study. Also reported in a recent Wall Street Journal article, they agreed to agree — both are causes..So the labour market is overheated “because of excess demand, but reduced supply, as well.” Yet governments, especially in the US and Canada, continue to stimulate through extensive subsidies with borrowed money. After an unprecedented series of four 75 basis point increases, the Fed — unlike Canada — paused as inflation declined to about half of its 9.1% peak. It suggested, however, future increases might be necessary, and time is needed “to assess additional information,” referring in part to the up to the 18-month lag between actions and outcomes..The economies of Canada and the US remain strong for now, while the possibility of recession continues in the future. Given strong consumer spending, Oxford Economics noted “the recession will be delayed.” Banking turmoil, higher rates and falling investment will eventually reduce demand. But, the timing remains uncertain..Second, government debt. Supporting citizens during the pandemic was necessary. But as balance sheets erode and rates increase, the cash cost of the growing debt increases. This is a long term problem and includes the broad global economy. According to the World Bank, the “average ratio of debt to GDP among the 28 poorest countries has grown to 67% from 36% in 2021,” as higher rates are “crimping growth.” Many “are simply growing poorer” according to the bank’s chief economist.. David DodgeDavid Dodge, former chairman of the Bank of Canada. .Meanwhile, what are Canada and the US doing? In his regular Bennett Jones Economic Outlook, former governor of the Bank of Canada David Dodge noted levels of public and private debt in Canada are at record levels. Likely also true in the US. Yet both continue their top down economic re-engineering by unprecedented subsidies and damaging policies. Responding to the alleged climate crisis, politicians cram down their values, further stimulate inflation and break the first rule of financial management — maintain financial flexibility — by encumbering respective balance sheets with more debt. Entitlements in both countries are deemed untouchable even as funding for Medicare and Social Security in the US is expected to dry up by 2033..In Canada the problems of our healthcare system are well known; the real crises have become obvious and are worsening..Third, what about a return to growth? Back to David Malpass, whose observations lament the decline of our enterprise system. Capital is now allocated away from small businesses toward bond issuers, governments and large businesses (often the recipients of subsidies,) all of which reduces the dynamism of economies. His example of US debt, on track to reach 200% of GDP as forecast by the Congressional Budget Office (not counting liabilities of the states,) is sobering. Debt levels in Europe, Great Britain, Japan and, increasingly, Canada raise doubt whether the private economy can “produce enough output and profit to carry the debt burden.”.Certainly, we can no longer rely on Chinese growth to solve our problems. Negative growth dynamics include enormous Chinese debt from the property boom and government over-investment, crackdowns on private enterprise, tumbling foreign investment, youth unemployment, an ageing work force, falling consumer confidence and an obsession with military security versus solid economics. These do not portend a return to high rates of economic output..The one significant economic outlier is India, which is projected to grow at 6% this year. Contrary to recent predictions that China's economy will surpass that of the US, it's more likely India, which recently surpassed China’s population, will also exceed China’s GDP. Most certainly clumsy and inefficient, India's market system is already outperforming the increasing top down smothering of China's free markets, responsible for its amazing past success..We may conclude we know the problems. Part of the solution is creating conditions that attract investment, employment and prosperity. That means that governments must stop investing capital that only comes from borrowing (increasing inflation) or by increasing taxes (discouraging investment)..David Dodge highlights the importance of thinking internationally and “playing the longer game.” He is predicting interest rates are unlikely to decline before 2024 or 2025 as inflation currently remains about 2% above the neutral rate range of 2.7 % — 3%. He also identifies the boring, but critical issue of declining productivity in Canada, now below the OECD average. He also laments our “regulatory morass.”.There are so many important priorities overlooked by our federal government obsessed with issues that mostly hinder economic performance. It hasn't even learned budgets do not “balance themselves.” The risks are real and significant. As Jack Mintz, academic, administrator, director and writer, recently opined in the National Post: “When the market begins losing confidence that a country will cover its debt payments, interest rates rise because of greater credit risk.".Quite: As more cash is consumed by interest charges, less is available for entitlements, military commitments and other demands by citizens..There is a solution. It's easy to blame politicians, especially since they are leading the parade. But we cannot expect them to be more responsible than we are ourselves. We need to stop demanding ever more government spending and evolve the narrative to responsible fiscal restraint and lower taxes. As a recent column in the Globe and Mail by Jason Clemens and Jake Fuss of the Fraser Institute pointed out, “government failure is not unique to the Trudeau government; instead, we should better understand the limits of government and adjust our demands accordingly.”.As an economy is the sum of it citizens, behavioral change begins with us.
The outlook for the global economy is troubling. In the words of the former president of the World Bank Group, David Malpass, it is “facing dangerously slow growth of 2% or lower. I worry that slow growth may persist for years.” This from an impressive opinion piece in a recent Wall Street Journal..The bank recently forecast global growth this year of 2.1% and 2.4% in 2024; the IMF 2.8% and 3% respectively. Most of the dynamics are negative, including the obvious — aging demographics, inflation, growing government debt, the breakdown of trust and trade arrangements between and among countries and in my view, a dearth of sound political and economic leadership. China is reducing interest rates, the EU increasing them, and the US is on pause — a global economy “out of sync” according to a recent WSJ headline..First, inflation. The debate changed as central bankers have long since accepted current inflation is not “transitory.” A question is what has caused the highest inflation since the 1980s — government stimulus or pandemic related disruptions? Ben Bernanke, former chair of the Federal Reserve Bank, and Olivier Blanchard, former chief economist of the International Monetary Fund, conducted a joint study. Also reported in a recent Wall Street Journal article, they agreed to agree — both are causes..So the labour market is overheated “because of excess demand, but reduced supply, as well.” Yet governments, especially in the US and Canada, continue to stimulate through extensive subsidies with borrowed money. After an unprecedented series of four 75 basis point increases, the Fed — unlike Canada — paused as inflation declined to about half of its 9.1% peak. It suggested, however, future increases might be necessary, and time is needed “to assess additional information,” referring in part to the up to the 18-month lag between actions and outcomes..The economies of Canada and the US remain strong for now, while the possibility of recession continues in the future. Given strong consumer spending, Oxford Economics noted “the recession will be delayed.” Banking turmoil, higher rates and falling investment will eventually reduce demand. But, the timing remains uncertain..Second, government debt. Supporting citizens during the pandemic was necessary. But as balance sheets erode and rates increase, the cash cost of the growing debt increases. This is a long term problem and includes the broad global economy. According to the World Bank, the “average ratio of debt to GDP among the 28 poorest countries has grown to 67% from 36% in 2021,” as higher rates are “crimping growth.” Many “are simply growing poorer” according to the bank’s chief economist.. David DodgeDavid Dodge, former chairman of the Bank of Canada. .Meanwhile, what are Canada and the US doing? In his regular Bennett Jones Economic Outlook, former governor of the Bank of Canada David Dodge noted levels of public and private debt in Canada are at record levels. Likely also true in the US. Yet both continue their top down economic re-engineering by unprecedented subsidies and damaging policies. Responding to the alleged climate crisis, politicians cram down their values, further stimulate inflation and break the first rule of financial management — maintain financial flexibility — by encumbering respective balance sheets with more debt. Entitlements in both countries are deemed untouchable even as funding for Medicare and Social Security in the US is expected to dry up by 2033..In Canada the problems of our healthcare system are well known; the real crises have become obvious and are worsening..Third, what about a return to growth? Back to David Malpass, whose observations lament the decline of our enterprise system. Capital is now allocated away from small businesses toward bond issuers, governments and large businesses (often the recipients of subsidies,) all of which reduces the dynamism of economies. His example of US debt, on track to reach 200% of GDP as forecast by the Congressional Budget Office (not counting liabilities of the states,) is sobering. Debt levels in Europe, Great Britain, Japan and, increasingly, Canada raise doubt whether the private economy can “produce enough output and profit to carry the debt burden.”.Certainly, we can no longer rely on Chinese growth to solve our problems. Negative growth dynamics include enormous Chinese debt from the property boom and government over-investment, crackdowns on private enterprise, tumbling foreign investment, youth unemployment, an ageing work force, falling consumer confidence and an obsession with military security versus solid economics. These do not portend a return to high rates of economic output..The one significant economic outlier is India, which is projected to grow at 6% this year. Contrary to recent predictions that China's economy will surpass that of the US, it's more likely India, which recently surpassed China’s population, will also exceed China’s GDP. Most certainly clumsy and inefficient, India's market system is already outperforming the increasing top down smothering of China's free markets, responsible for its amazing past success..We may conclude we know the problems. Part of the solution is creating conditions that attract investment, employment and prosperity. That means that governments must stop investing capital that only comes from borrowing (increasing inflation) or by increasing taxes (discouraging investment)..David Dodge highlights the importance of thinking internationally and “playing the longer game.” He is predicting interest rates are unlikely to decline before 2024 or 2025 as inflation currently remains about 2% above the neutral rate range of 2.7 % — 3%. He also identifies the boring, but critical issue of declining productivity in Canada, now below the OECD average. He also laments our “regulatory morass.”.There are so many important priorities overlooked by our federal government obsessed with issues that mostly hinder economic performance. It hasn't even learned budgets do not “balance themselves.” The risks are real and significant. As Jack Mintz, academic, administrator, director and writer, recently opined in the National Post: “When the market begins losing confidence that a country will cover its debt payments, interest rates rise because of greater credit risk.".Quite: As more cash is consumed by interest charges, less is available for entitlements, military commitments and other demands by citizens..There is a solution. It's easy to blame politicians, especially since they are leading the parade. But we cannot expect them to be more responsible than we are ourselves. We need to stop demanding ever more government spending and evolve the narrative to responsible fiscal restraint and lower taxes. As a recent column in the Globe and Mail by Jason Clemens and Jake Fuss of the Fraser Institute pointed out, “government failure is not unique to the Trudeau government; instead, we should better understand the limits of government and adjust our demands accordingly.”.As an economy is the sum of it citizens, behavioral change begins with us.
