Macroscope | Global policymakers are sleepwalking into another crisis
A credible action-plan for sustainable global recovery is urgently needed
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.