On Tuesday evening we brought you a fresh look at the worrisome deceleration in the pace of global trade, on the way to reiterating a point we’ve been keen to drive home over the last six or so months. Specifically, the post-crisis world may have witnessed a kind of seismic shift wherein depressed global trade has become structural and endemic rather than cyclical and transient.
To quote WTO chief economist Robert Koopman. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”
Yes, it is “almost” like that and as it turns out, the OECD is starting to come to the same conclusion even if they’re predisposed to cheer the relative strength of America’s cleanest dirty shirt economy. On Wednesday, OECD cut their forecast for global growth to 3% in 2015 and 3.6% in 2016. Here’s the full breakdown:
And here’s some commentary from OECD Chief Economist Catherine L. Mann:
“Global growth prospects have weakened slightly and the outlook is clouded by important uncertainties. Emerging economies have vulnerabilities that could be exposed by rising US interest rates and/or a sharper-than-expected slowdown in China, giving rise to financial and economic turbulence that could also exert a significant drag on advanced economies. Continued policy stimulus is warranted to support global demand, but the mix of policies will differ by country, and choices need to be consistent with financial stability and reviving long-run growth.”
Got that? Basically it’s a reiteration of a now familiar narrative: EM is one the verge of a meltdown caused by tremendous pressure on commodity currencies and depressed global demand (i.e. China). A Fed hike could tip the emerging world into crisis and that crisis would then feedback into DMs, exacerbating the already abysmal state of the post-crisis “recovery.”
But here’s where the picture becomes clouded.
As we’ve discussed at length, nervousness across the emerging world stems in part from uncertainty surrounding the Fed. That is, the more apparent it became that the FOMC had missed its window, the more nervous markets became and this added to the pressure on EM currencies. Now, in the wake of the yuan devaluation, these economies are at the brink and anything the Fed does will turn out poorly. Hiking risks plunging the entire EM space into chaos virtually overnight, but waiting just exacerbates the uncertainty and the capital outflows will likely pick up again after a brief period of respite. The OECD’s suggestion: hike now.
The Interim Economic Outlook calls for global macroeconomic policy to remain supportive of demand. Advanced economies should continue accommodative monetary and fiscal policies to ensure that the recovery gains momentum. The US Federal Reserve will soon need to begin to raise its policy rate at a gradual pace, given the solid growth of the US economy and concerns over asset prices. The timing of the first rate rise will make little difference to the outcome, but the pace of increase does matter.
The OECD's reasoning becomes a bit clearer when we consider the following quote from Mann: "Raising interest rates now would remove uncertainty in the markets. The path matters four times as much as the timing."
In other words, EM is doomed either way, so best to just provide some certainty and hope for the best in the near-term. In the medium-term, it's important to make sure the "path" is dovish. Here's what that looks like:
So essentially, the Fed needs to go ahead with a symbolic 25 bps hike and then from there, try to find the goldilocks "path" that's steep enough to provide it with enough rope to reverse course once the tightening triggers a meltdown in EM that feeds back into advanced economies, but not steep enough to exacerbate said EM meltdown. The only way it turns out any different is if you assume that months of uncertainty about the Fed, collapsing commodity prices, and the tumultuous fallout from the yuan deval have all served to push EM to the point that everything is now "priced in." Of course, there is probably no more dangerous phrase in all of capital markets than this one: "It's probably priced in."
In any event, the big picture takeaway is that slowly but surely, all of the very "serious" people are coming to the same conclusion. Namely that the outlook for global growth and trade is grim, especially by historical standards, and that - although OECD doesn't say this - should serve as a damning indictment of the idea that economic outcomes can be engineered from on high by central planners. The sad reality however, is that far from admitting that the coordinated Keynesian response to the crisis has failed and perhaps even exacerbated the slowdown in growth and trade by perpetuating a global deflationary supply glut, slowing growth will instead be trotted out as an excuse to double down on the very same policies that aren't working.