Growth on rebound despite underlying presence of crisis

Understandably, it is fashionable to be pessimistic. We have just lived through a financial and economic crisis that was, for some countries at least, worse than the Great Depression, which probably makes it the worst ever. And it is not over yet: debt overhangs will present headwinds for years to come.

Large economies like France and Italy are beginning to look like beached whales – stuck in a low or no growth trap with little to suggest that things are going to change soon. Politics looks dysfunctional on both sides of the Atlantic, albeit for different reasons. Leadership, it is often said, is noticeable by its absence.

The euro crisis may have become merely chronic rather than terminal, but the single currency remains an accident waiting to happen.

Narrow policy options
Prominent economists argue that the absence of transformative technologies means that growth is over, no matter what policymakers do. Technical economists like Larry Summers think that the

“natural” rate of interest is now significantly negative: central banks cannot lower rates below zero so the result is “secular stagnation”.

Productivity growth is mostly noticeable by its absence from the global economy; emerging market equities are signalling trouble for some economies.

So why are stock markets soaring? Why is the S&P500 reaching new highs, almost on a daily basis? The doom merchants point to the behaviour of central banks. All that money they are printing has to go somewhere. And they might be correct, but an alternative explanation seems to me to be at least equally plausible.

Market efficiency
Economists have been chastised for their lack of foresight: they didn't see the crisis coming and, for the most part, championed deregulation and a belief in market efficiency, both primary drivers of what happened next.

In such circumstances, suggesting that the world is slowly healing and that things might just turn out okay represents a serious threat to careers. It is far safer to talk about risks. A retreat into the more dismal aspects of the science represents something of a comfort blanket.

But growth is back, at least in some parts of the world. It may be tentative but forecasters have already been surprised and have had to revise up their estimates for 2014 and beyond.

Evidence of a restorative process is to be found in surprising places. Old-fashioned economic analysis tells us to always look at financial imbalances for signs of trouble ahead. We have been warned for years that the twin deficits of the United States (fiscal and balance of payments deficits) would sink that economy. Markets and politicians were obsessed with the bilateral China-US trade imbalance. More generally, current account deficits around the world have long attracted the worriers at the International Monetary Fund.

Loss of competitiveness
And it is true that all of those imbalances, including our own – as we lost competitiveness – should have been watched more closely (but they were not a primary cause of the crisis).

One of the leading economists in the field of international trade, Barry Eichengreen, has recently written a fascinating piece entitled, A Requiem for Global Imbalances. For the first time in many years, the US is now financing itself without any net borrowing from overseas.

That’s a big change.

Correspondingly, foreign reserves being accumulated by China, Japan and many emerging economies have also slowed to a trickle. This is all very good news. A big source of concern has been removed. Some people have been slow to notice all of this and equally slow to realise what it means. It is much more fun to bash China for its trade practices than to acknowledge that the problem has simply gone away.

Mystery of growth
It is noteworthy that one of the biggest imbalances

is to be found in Europe: Germany's trade surplus is a growing source of concern.

All forecasts for growth have to be accompanied by humility and honesty. We don’t really understand growth: there are many aspects of it that remain mysterious. We certainly have no better understanding of the business cycle than when Keynes first suggested a method for taming it back in the 1930s. That the UK resumed growth in 2013 came as a shock to virtually every forecaster out there. Why it happened remains as odd and as unexpected as Arsenal’s lead in the Premier League.

Economies have a habit of growing – they do this more often than not. Often, the source of trouble lies with the behaviour of the financial system and the mistakes of policymakers. Sometimes, things like oil price shocks can derail things for a while. Right now, it could just be that the things that restrain growth’s natural occurrence are gently fading away.