By Dr Don Stammer - adviser to Altius Asset Management and columnist at The Australian. The views expressed are his own.
Next month marks the 10th anniversary of the worst days of the global financial crisis in 2008, when governments and central banks around the world took urgent action to prevent financial systems from collapsing and to avoid a deep and lasting economic depression taking hold.
Early on, many people expected a “new normal” of slow and hesitant economic growth with sustained low returns on all major asset classes; “secular stagnation” was a widely-held fear.
As time passed, however, the upswing in global business conditions continued.
Indeed, it’s now looking a lot more like the recoveries that followed earlier financial crises — initially a slow pick-up, then quickening as confidence rebuilds and as memories of the crisis fade.
The main differences, this time, are the exceptionally high rates of return that most asset classes have delivered since the upswing began — in large part, of course, because interest rates fell to such low levels — and the still-low rates of inflation.
The role of China and the US in the global recovery
The US and China — two very different economies and now antagonists — have led the global cyclical upswing.
Extremely accommodative monetary and fiscal policies in Europe and Japan are helping to sustain it.
The US economy has delivered strong growth in jobs since 2009. The US is fairly close to “full employment”, inflation is mild and the Fed has raised its cash rate from near zero to two per cent.
With the huge fiscal stimulus from the US tax cuts now coming through, early recession in the US seems unlikely — provided the Fed continues to move reasonably cautiously.
China announced a massive easing in budget and monetary policies almost as soon as the global financial crisis erupted. The Chinese stimulus largely protected the economies of East Asia and the western Pacific, including Australia, from the recession and the slow growth North America and Europe experienced at the time.
As Glenn Stevens, the governor of the Reserve Bank observed in 2010, “the global financial crisis … was really only a global crisis for six to eight weeks … The rest of it is mainly a North Atlantic story.”
As a result of the Chinese stimulus, Australia experienced a full-fledged mining boom; commodity prices surged and so did capital spending in the resource sectors.
Commodity prices have since moved around a fair bit, but are still at levels (for example, $US70 a tonne for iron ore) that resource companies could only dream about in the late 1990s and early 2000s.
China’s growth rate could well slow — to between 4 and 5 per cent — over the next couple of years, as the strong growth in credit from earlier rounds of easing is reigned in.
But, even if the trade wars escalate somewhat further, consumer spending and growth in the services sector should help China avoid recession over that time frame.
Assorted crises haven't significantly affected the recovery
From time to time, “fake crises” have marred expectations the global economic recovery would continue — and more are to be expected. In 2011, expectations of a US “double-dip recession” abounded — and were proved wrong.
In 2011 and 2012, market talk focused on prospects of sovereign debt crises in Europe; they were averted. In 2013, the “taper tantrums” (that the Fed would move too quickly in phasing out its purchases of bonds) led to unnecessary fears of an imminent US recession.
In late 2015 and in early 2016, exaggerated concerns also built up of a “hard-landing” for China and for a slump in the US economy — neither of these events came to pass.
A range of geopolitical issues have emerged or worsened in the 10 years since the global financial crisis, including the beginnings of a trade war; tensions in the Middle East; Russia’s flexing its muscle; China’s construction of naval bases in the south China sea; North Korea becoming a nuclear power; the surge in refugee numbers; and an abundance of political populism.
These concerns have, so far, done little to affect investment returns. Rather the global economic recovery has continued and recently gathered pace.
Will inflation stay low?
Globally, inflation has remained extremely low since the GFC, and that’s despite accommodative monetary and fiscal policies in the big economies and big gains in employment particularly in the US and Australia.
But the widespread concerns of deflation and of secular stagnation that followed the crisis have dissipated.
Many reasons are offered for the long period of near-negligible inflation: globalisation, the online market place created by new technology, job insecurity, the weakening of labour unions, the move to independent central banks, and the huge dent which the GFC 10 years ago made on inflationary expectations.
Perhaps we’re close to the end of the long period of extremely low inflation. I see merit in the view Tim Baker of Deutsche Bank has expressed:
“Tightening labour markets have been a feature of most countries in recent years, as the economic recovery ate into labour market slack … But the past six months have seen a revival in wages growth across several countries, including the US, Canada and the UK in particular.” (Japanese wages have also risen.)
Globally, wages and inflation seem on course to trend higher — and with occasional bumpy moves as occurred in the US in February.