World economy: the expansion is becoming precarious

This week, we will hear a lot from the IMF and World Bank spring meetings in Washington about the tensions in the world over trade and tariffs, the virtual standstill in productivity growth, and the question of how to secure reductions in both economic inequality and carbon emissions. The main media focus, though, will be on the IMF’s view about where the world economy is heading, against a background of rising angst about the strength and durability of what is already quite a long economic expansion.

The IMF lowered its global growth forecasts for 2019 and 2020 to about 3.5 per cent in January, and a further small downgrade is likely. No recession is forecast, but the IMF will probably say the expansion is becoming more delicate in view of policy uncertainties in many major regions, the effects of trade tensions, and the deleterious impact of political flux and populism on consumer and business sentiment.

The US expansion continues, even if at a lower tempo, and by July it will become the longest since business cycle records started in 1854. It’s already 39 quarters old as of March 2019, and by June will match the longest ever expansion that lasted from 1991-2001. Pervasive concerns in financial markets a few months ago that the Federal Reserve would kill off the expansion by over-tightening have faded, now that the Fed has indicated a more dovish stance. So it is possible the expansion could just keep rumbling on into 2020. The one-off impact of Trump’s 2018 tax cuts has passed, and “fiscal drag” is evident as America’s growth becomes more sluggish. But for the moment the economy rolls on, while job growth is continuing, unemployment is low, wages are picking up a bit.

Remember that expansions don’t die of old age. Consider Australia, whose expansion has been underway for 27 years. Expansions end when someone or something chokes them.

China was a worry over the winter, but as the government stepped up credit stimulus, cut taxes and allowed the fiscal deficit to rise, the economy seems to have stabilised in the last two months. China’s economy may just about be out of a cyclical dark spot now. None of this means that previous concerns were misplaced, that current stimulus will have strong traction, or that the medium-term outlook for China isn't challenging on multiple fronts. These include excessive leverage, a vulnerable currency, trade tariffs, weaker consumption trends, and a political stance that works against needed reforms and private firms to the benefit of state enterprises and public ownership. These, though, are for another day in the not too distant future.

There will also be considerable worry about the economic health of Europe, in particular the weakness of the euro area economies, now likely to grow by little more than 1 per cent in 2019, which is even less than their low trend growth rate of about 1.25 per cent. The outlook could be even harsher if the White House moves to subject auto imports to punitive tariffs, given that 10 per cent of EU exports are auto and parts shipments to the US. The European Central Bank’s March decision to extend monetary accommodation is welcome, but Europe needs a more fiscal, considered and targeted approach to strengthening growth. And this is without considering the effects of Brexit on the UK and the EU, given its unpredictability.

Emerging markets have acquired some breathing space, thanks to the change in the Fed’s interest rate posture which has also spilled over into a more stable US dollar, and to the rather more encouraging economic numbers coming from a cyclically better China. That space, though, is also compromised by weaker growth in rich economies, a trade environment that’s likely to remain fractious, a reform hiatus in much of Asia and Latin America, and the imminence of significant external debt repayments in the next one to three years.

One interesting point that the media may pick up on is the IMF study on rising corporate power, or the dearth in competition. In its report, it says that corporate market power has increased in many advanced economies, as measured by price mark-ups. Not so, interestingly though, across many emerging markets. Further it argues that this rise in market power has been concentrated among a small fraction of dynamic firms. Technology firms are the obvious example, but we have also seen this in, for example, the retail, leisure, media, transport and communications sectors, and in the US also healthcare sectors. Some of this trend may be attributable to the shift in the character of corporate capital assets to what is called “intangible capital” such as software and intellectual property. Even so, concentration is concentration.

While the macro consequences of this concentration of power may have been modest so far, the IMF warns that the trend is potentially alarming as, unchecked, it could weaken investment, deter innovation, reduce the share of labour in income, and compromise the healing capacity of monetary policy.

One of the things the world is trying to figure out is how to transition from a so-called neoliberal/free market model to something else without going to full state and public ownership. Corporate concentration is a suitable case for treatment. It’s time for regulators and governments to rein in monopolies and mergers, and allow more competition to flourish.

Ironically, Britain, which has a high level of corporate concentration, needs a good dose of regulation and competition-enhancing reforms, just as the government seems intent on leaving the single market and escaping EU market regulation. The timing couldn’t be worse on this count either.