BANGKOK: The state of the global economy today is disjointed and complicated. To understand this complexity, derived from many countervailing forces, one needs to differentiate the short-term outlook from the longer- term challenges. In the short term, the global growth story is all about transition. Since the peak of the credit cycle in 2014, the global economy has entered into an important transition propelled by the forces of debt deleveraging, the slowdown in China, and the move toward normalisation of the US’s monetary policy.
This transition is a positive development and should pave the way for stronger growth and recovery going forward as the global economy moves away from an unsustainable equilibrium of excessive debt and leverage to a new equilibrium of more balanced growth and less debt.
China’s transition, for example, to a slower growth economic model is good for China and the world economy. A normalisation of US monetary policy is also long overdue as it would help reduce incentives for speculation with ultra-low interest rates and avoid a possible debt-driven boom and bust scenario further down the road.
However, this transition is far from complete; a firm recovery of the global economy has not materialised. The fragile recovery stems largely from unresolved structural problems linked to the global crisis of 2008, especially problems in the labour markets and banks in Europe, and uncertainties linked to grim faith in the strength of macroeconomic policy to lift growth. The ongoing political turmoil and associated security concerns in many parts of the world have also weighed down confidence and economic activity.
Reflecting this, global economic recovery so far has been mild, depending greatly on central banks’ liquidity injections and stimulus measures. Meanwhile, the flood of liquidity has boosted global asset prices, in contrast with generally weak economic growth and fundamentals. Such divergence is not sustainable and eventually something will have to give.
