Mohamed A. El-Erian is chief economic adviser at Allianz. He was previously chair of President Obama’s Global Development Council, deputy director of the International Monetary Fund and CEO of PIMCO. He is a member of the Berggruen Institute’s 21st Century Council.
The World Economic Forum this week in Davos comes amid a dramatic change in the global economic climate over the past year. In just one year, excitement about a widespread pickup in global growth and booming stock markets has given way to concerns about a synchronized slowdown and renewed financial instability, especially with the continuing partial government shutdown in the United States and the slowest Chinese annual growth rate in almost 30 years.
Davos has historically been much better at looking backward than forward. This year, however, it will help no one to engage in pointless moaning and blame games. The discussions need to focus instead on solutions and doing so begins with an understanding of the causes behind this swift economic shift.
The synchronized pickup we saw a year ago was primarily driven by either eroding drivers or one-off factors rather than by effective pro-growth policies. It is not surprising, then, that the pickup did not last.
Europe, for example, was in a post-crisis phase of economic healing that helped lift some nations out of their malaise. But the beneficial impact of this recovery period naturally diminished over time. This temporary lift also occurred before the European Central Bank started to gradually ease its foot off the monetary stimulus accelerator last summer.
China, meanwhile, had yet to intensify its reform effort to escape the tricky middle-income trap and was still relying excessively on foreign markets, credit and state-directed investment. The Chinese economy was therefore already facing mounting challenges even before it had to tackle the economic uncertainty resulting from a trade dispute with the United States.
Three other key emerging countries were recovering from dips in growth due to one-off factors: India following Modi’s ban on large bills to counteract the black market, Brazil due to the heightened political uncertainty generated by a messy presidential transition and Russia after the drop in oil prices. The subsequent recoveries were notable in the short-run but lacked longer-term legs.
Only the United States was powered by pro-growth policies, including deregulation and tax cuts. That, along with a strong labor market and ample cash on corporate balance sheets, contributed to strong consumption and business investment.
As 2018 progressed, growth momentum lapsed around much of the world, unsettling markets and investors. Germany and Japan registered negative GDP growth in the third quarter. And the most recent forward-looking indicators for the manufacturing sectors in China, Germany and much of Europe have pointed to heightened risks of economic contraction.
Regional and international cooperation haven’t acted as much of a counter. Much of the European Union’s policy focus was distracted by the Brexit process, changing political leadership, and clashes between the European Commission and some E.U. member countries. The G-7 and G-20 summits struggled to agree on a communiqué, as watered down as these have traditionally been. And it took a relatively long time for America’s trading partners to realize that the better response to U.S. tariffs was not a tit-for-tat but rather, concessions aimed at modernizing existing agreements and, more generally, achieving still free but fairer trade.
All this stood in contrast to higher American growth, accompanied by the impressive continuation of job creation and wage growth. This occurred despite the Federal Reserve embarking on a gradual reduction in its balance sheet and hiking interest rates four times in 2018 — beyond what markets had expected, especially at the start of the year.
But even solid U.S. growth prospects could now be at risk, with concerns that declining growth elsewhere could contaminate the United States, especially following Apple’s warning on Jan. 3 about a revenue shortfall due to slow growth in China. Should America stumble, which is far from certain, the risk of a self-feeding global slowdown would be considerable.
However, even under this more worrisome global scenario, we are not likely to see a repeat of the 2008 crisis. And there is nothing predestined as yet about a major global slowdown this year. Indeed, there are some critical measures that can help prevent such a decline. What’s most required is a broad-based effort to bolster growth and address deep resentment about the inequality of income, wealth and, most importantly, opportunity.
Europe, in particular, is in need of more pro-growth policies with the tapering of the European Central Bank stimulus. It must start with structural reforms aimed at boosting lagging productivity, modernizing infrastructure, increasing labor mobility and deepening financial resilience. This should be reinforced by a more balanced fiscal policy among eurozone member countries and further strengthening of the regional architecture by completing the banking union and improving public policy coordination.
What’s missing is the political runway to implement many of these measures. Political polarization is hindering the next pro-growth initiative the United States needs — a bipartisan-supported infrastructure program to enable businesses to productively do more. Brexit continues to polarize politics in the United Kingdom, taking virtually all the oxygen away from economic policymaking initiatives. In France, President Emmanuel Macron’s reform efforts have been slowed by repeated protests. And a number of other European countries, including Germany and Italy, are dealing with leadership change.
But the challenges are not limited to governments. The private sector needs to step up to the plate by expanding its labor retraining programs, making greater use of apprenticeships and continuing to deepen social responsibility efforts. It is not just the right thing to do — it also aligns with longer-term profitability and broader corporate interests. With central banks having less ammunition to counter a serious economic slowdown and with some fiscal balances already quite stretched, the private sector would have a lot to lose from a self-feeding economic slowdown.
Economists mostly agree on what’s required to avoid a global slowdown. It’s up to political and business leaders, many of whom will be in Davos, to find imaginative ways to turn into a reality what’s not just technically feasible but also urgently required for the well-being of citizens around the world.