Standard & Poor’s has hired a terrific operator in Paul Sheard, its new chief global economist and head of global economics and research.
In the past few days I have been moderator at the annual “Breakfast with the Economists” functions in Auckland and Melbourne where Sheard, who is based in New York, has been the global voice setting the scene for the local economists to frame their views of domestic conditions. The Sydney breakfast was this morning.
Sheard’s overview, interjections and insights have only worked to reinforce the view that the G7 economies are is deep trouble and that China and Asia more generally are being caught in the backwash of this funk.
For those who attended, the gist of what follows should be pretty clear. For those who missed these breakfasts, read on.
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“Precarious” is how Sheard described the global economic outlook. He outlined the risk of a eurozone break up and the US fiscal cliff, both huge issues that can’t be fixed easily or quickly.
Some striking facts about the global economy since the crisis erupted in 2008 are that China has registered average GDP growth of 9%, the US 0.3% and the eurozone minus 0.4%. These are extraordinary results.
The averages over a four-year timeframe highlight several issues. According to Sheard, the bulk of the US out-performance versus the eurozone is merely a reflection of it having faster population growth. In other words, the per capita performance of the US economy is only marginally better than the eurozone.
It is little surprise therefore, that Sheard expects a further bout of quantitative easing from the US Federal Reserve. Given the success of previous rounds of QE, more of the same can help push growth and jobs higher and the unemployment rate lower.
The European Central Bank will also buy bonds of the peripherally weak countries as it tries to hold the eurozone together.
Most relevant to Australia, according to Sheard, are the Chinese numbers. In the midst of the deepest, darkest and more dangerous banking and financial crisis since the 1930s Great Depression, China has been able to maintain a blockbusting 9% growth pace. Sure there have been swings in growth from lows about 7% to peaks near 12%, but the massive and quite fearless pump priming of the Chinese economy underpinned a truly remarkable performance.
For a market that takes about one-quarter of Australian exports, China is very clearly one important factor that helped Australia negotiate the crisis with limited collateral damage.
Sheard, a Japan specialist, highlighted some frighteningly gloomy data about the Japanese economy over the past two decades. The deflationary sand in the engine of the Japanese economy has, since 1994, seen nominal GDP fall a staggering 10% over that time while the GDP price deflator is down 18%. That is, very simply, annual average deflation of 1% over 18 consecutive years.
Unhelpful demographics with an ageing and falling population together with cumbersome and misdirected policy remain issues that Sheard expects will lock Japan in this economic gloom for years to come.
Sheard doesn’t think the eurozone’s current problems are at all like Japan’s — Europe’s dismal economic performance was driven by a significantly different source. In Japan, it was an asset bubble that fed into mass banking decay.
The eurozone’s problems, on the other hand, were fiscal. When the eurozone was cobbled together in 1999, a massive oversight in the terms and conditions related to fiscal issues. This meant that the governments of Greece and Spain, for example, played fiscal games and their spending and taxing agenda was in stark contrast to the prudent Germans. An economic armageddon was assured.
This lack of a fiscal union means it is difficult for the fiscal profligates to be either reined in or then helped when they inevitably run into difficulties. It means the taxpayers in the more prudent countries get annoyed when their taxes are directed to a profligate government elsewhere.
This is what is playing out now. We are probably just days from the European Central Bank embarking on a round of bond buying as it works to hold the eurozone together. The Germans — its people and bureaucrats — are vocal in their opposition to bailouts. The Greeks, conversely, are baulking at the austerity in the conditions attached to the bailout being delivered.
The problems in Europe will be around for years. Sheard rather neatly summed up the position right now, with the looming ECB action set to be chapter three or four of what in years to come will be a 15-chapter treatise of the failed European economic experiment.
This may well be a book that Sheard himself will write. If so, it is one that will be worth buying for its views and analysis of what is happening right now.
*This article was first published at Business Spectator