by Chris Skinner for Iris.xyz
I was lucky enough to be invited to a conference of the great and the good managing one of the large economies of Europe the other day.
It was in a fine location, with lots of dignitaries, media coverage, security guards and German shepherds. On that last point, the dogs, not guys herding sheep.
Anyways, I enjoyed it, but it was all very formal. All the men were wearing suits and ties and I’ve grown so accustomed to my FinTech uniform these days that, for me, dressing up is wearing a button-up shirt and a jacket with my jeans. Felt a little bit out of place, but hey, at least I didn’t look like the old men in the audience in general.
It was interesting, as the audience did comprise many banks and bankers, which is why I was on the agenda. They wanted to talk about FinTech. But they also had sessions on the world economic outlook, emerging markets, risk and the specifics related to the Eurozone.
The first session focused on the global economy and, because it was held under The Chatham House Rule, I am unable to tell you who discussed this! I can tell you it was a panel of very esteemed economists and, suffice to say, they had a lot of detailed charts and dialogue about numbers and stuff. There was also a lot of agreement that the outlook is a little bit bleak. Although the collective noun for a group of economists is a confusion, this group was not that confused. In fact, they all seemed to be in agreement that the outlook is uncertain; there are huge concerns about trade tensions and a new Cold War between America and China; Brexit is bringing Europe down but then so is contraction in the German, French and Italian economies; and that there is a synchronised movement towards a global slowdown.
It won’t be a meltdown (although I forecast there will be one soon), but a slowdown. As Nouriel Roubini, a former adviser to the White House, recently wrote in The Guardian, this will be because central banks are on the case:
Though there is a cloud over the global economy, the silver lining is that it has made the major central banks more dovish, starting with the Fed and the People’s Bank of China, and quickly followed by the European Central Bank, the Bank of England, the Bank of Japan and others.
But I am not so sure. I’m not an economist or even an expert in the world outlook, but looking at the numbers everyone was making it clear that the uncertainty over China’s future growth is the biggest concern right now. In fact, a particular comment struck me as interesting which is that only 5% of America’s exports go to China, but a fifth of China’s go to the USA, which is why Trump has started this trade war. But the more notable comment is that half of China’s exports go collectively to America and its allies. The European Union, Australia and other countries could have been aligned to make Trump’s case for trade tariffs and more reciprocity far more compelling. Why he didn’t do that is… because Trump is just Trump. But if he were to do this and get other nations on board in a consensus, then the trade imbalance with China could be rectified.
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All of that is fine and good, but when we cannot even get the Eurozone aligned in talks with China, how can America get all of us to work together, was another question. Italy recently struck on a bilateral Memorandum of Understanding (MoU) with China to be part of its belt-and-road policy, much to the disappointment of the USA, and other nations may well follow in what is essentially a fragmented Europe.
That’s no better illustrated than by Brexit, but it’s more than that. Europe is in a bit of a rock-and-a-hard-place situation. The OECD estimates that job growth will halve in the next two years compared to the last two years, and most economists seem to believe the Eurozone could not stand another global recession of the size of the one a decade ago.
All in all, I think the most telling statement came from one panelist who talked about why central banks are getting this all wrong, in stark counterpoint to Roubini’s points about dovishness mentioned earlier.
According to this economist, who has also worked with the White House, central banks are misreading the signals and, in many cases, are reading the wrong signals, such as the US Yield Curve. These indicators are no longer the right indicators for future economic stability because there are unexpected decisions and actions taking place, such as Brexit and the US-China trade war. The consequences of these actions are not known. Equally, the shifts in global economic relationships are fundamentally changing as we deglobalize.
This means that the old ways of calculating future economic and monetary policy no longer work. New ways are needed. In fact, my favourite quote of the discussion was this:
If you want tomorrow to be different, you must not do today what you did yesterday.
Too darned right. After so much economic change, quantitative easing, zero interest environments and squeeze on growth since 2008, what can central banks do differently to stimulate growth tomorrow by not doing what they did yesterday?
Unfortunately, no one really answered that question, so I’m still left wondering. Maybe we should run away and do a bilateral deal with China?