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Global policymakers are sleepwalking into another crisis

A credible action-plan for sustainable global recovery is urgently needed

PUBLISHED : Monday, 22 February, 2016, 12:25pm
UPDATED : Monday, 22 February, 2016, 6:32pm

Global investors are living in strange and difficult times. It is not the real world as they used to know it, but a zombie economy, pumped full of monetary steroids and lurching from one crisis to another. Global growth is fast losing momentum, facing a myriad of risks while another crash could be on the way fairly soon.

It is no surprise that world stock markets and risk assets have hit the skids this year and that flight to quality and safe haven trades remain the preferred boltholes for investors right now. The worry is that the list of negative factors keeps growing with little end in sight. Investors probably need to batten down the hatches for quite a while to come.

Conventional and unconventional stimulus efforts are becoming less effective

The cycle of recovery from the post-2008 global financial crisis, has entered into a new phase with a period of attrition probably becoming embedded over the next few years. The ‘irrational exuberance’ that lifted investor morale for six years in the wake of widespread quantitative easing and zero interest rate policies has given way to a spreading rational despair.

The downturn in global growth, fears of a hard landing in China, the crisis in emerging markets, the commodities crash, chronic deflation risks and the deepening policy void compound a bleak outlook for investors right now. Conventional and unconventional stimulus efforts are becoming less effective while background worries about further Fed tightening are weighing heavily on global confidence.

The global economy is still suffering aftershocks from the global financial crisis. Balance sheet restructuring, deleveraging, debt deflation and fiscal austerity have left lasting scars. Global consumer, business and investor confidence is still not fully recovered. Labour and product markets are still living in the shadow of excess capacity and weak output gaps.

The world economy has effectively been stuck in lacklustre recovery despite coming out of casualty quite early on from 2009. Had it not been for the extreme rescue remedies of zero interest rates and quantitative easing from the major central banks, the world would have been trapped in a more deeply deflated and depressed state.

Stock market sentiment has only been kept afloat during the last six years thanks to a massive infusion of QE money. But risks still remain. Investor sentiment remains vulnerable on a large number of fronts. Global liquidity remains high but world debt levels remain a major threat, especially with depressed commodity and energy prices hitting debt-exposed emerging markets, stoking further worries of another serious credit event looming sometime ahead.

Geopolitical tensions stand at elevated levels, sapping investor morale in the process. In Europe, worries about a possible British exit from the European Union are a sharp reminder of endemic break-up risks in the euro zone. Conflict in the Middle East continues to fuel acute volatility and uncertainty in global energy markets.

Global policymakers remain in disarray, just adding to the general confusion. In the US, it is not only worries about the Fed’s rate tightening intentions, but also at what point the US$4.5 trillion dollars of stockpiled QE purchases is disbursed back into the market. The outcome of the 2016 US Presidential elections could have a major bearing on that aspect over the future.

In Europe, the European Central Bank is about to hit the panic button on lower rates with more QE, frustrated over the lack of progress on economic recovery and this could hit the euro hard. Japan’s reflation strategy seems to have stalled, with the stronger yen compounding Tokyo’s problem. China needs to focus on domestic recovery efforts rather than relying on currency devaluation as an export-growth driver.

Supranational bodies like the International Monetary Fund seem to be in complacent denial over the nascent risks. In its January forecasts, the IMF expects global growth to rise to 3.4 per cent this year and 3.6 per cent in 2017 after 3.1 per cent last year. These numbers seem far too optimistic and inconsistent with the IMF’s own warnings about subdued demand and diminished growth prospects given potential economic and political shocks ahead.

Global policymakers are sleepwalking into another crisis. In a world where the unconventional is fast becoming the norm and traditional perceptions of risk and return are quickly being swept aside, the world’s economic leaders need to tackle the impending crisis head-on.

The clock is ticking. A credible action-plan for sustainable global recovery is urgently needed before time runs out and the world succumbs to a deeper crisis.

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