Crisis? What Crisis? This Crisis

The world is falling down...I’m really worried that no one is talking about it here

Unemployment is falling. In Ireland. Inflation is not a problem. In Ireland. Growth is resurgent. In Ireland. Debt levels for households and the government are falling. In Ireland. Trade with the rest of the world is growing. In Ireland. Migration is not a daily issue obsessing policy makers. In Ireland.

But what about the rest of the world? This will be an exercise in changing focus.

First, let’s look at the island of Ireland and its Republic, with its 4.68 million souls.

We have absorbed a narrative that recovery has taken hold, that the good times have come again. It’s a message we want to hear.

Irish people are queuing to get into shops to spend their money again. Retail sales for the Christmas period were up by more than 3 per cent overall, and more than 7 per cent in retailers like Lidl and Aldi. Irish people aren’t just queuing to buy things again. There are so many in the shop in front of them also buying things that they have to queue outside the shop just to get in. Nespresso, the luxury coffee maker, has opened a shop in Dublin, where you can queue up to pay a 2,000 per cent premium for its coffee relative to instant coffee. A barrel of Nespresso is more valuable than a barrel of oil at present. You can’t keep the Clooney-branded machines on the shelves.

Government tax revenues are buoyant. Brendan Howlin and Michael Noonan have almost balanced the books before interest payments on the national debt with €6.9 billion more than they expected to have.

The European Commission stopped just short of calling Budget 2016 a political budget designed to buy votes, and across the airwaves in the run-up to the election, politicians of all stripes are promising tax cuts and spending increases, all to be paid for with the proceeds of future growth. As many before me have said, this is like spending tomorrow’s money today.

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In the last crisis, both here in Ireland and across Europe, greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital. The result? We built houses to sell to each other, rather than building new hospitals. I think we’re back there again.

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It feels like 2006 again in parts of Dublin, where young middle-class people looking for houses enter through the catflap to beg for a chance to be outbid by a cash buyer for a cottage between two railway tracks, while working-class people get pushed aside by developers, eager to earn a margin, and the homeless are pushed aside. Long-term issues such as flooding, demographic change and our education system do the rounds of the hand-wringing classes on Sunday radio programmes and are quickly put back in the box before the football starts. All of a sudden, the good news has mollified our concern for change. It has left us unsure of what to do next, but we’re sure that the good times are here to stay.

Ireland, the entire nation, is in a bubble. Thanks to the ECB (remember them?), we have been propped up by a weak euro which made our exports competitive, a ridiculously low cost of sovereign borrowing, and a functioning banking system. Thanks in part to the global clean energy revolution and the shale gas expansion, especially in the US, and to China’s stuttering economy, the price of oil – all of which we must import – has fallen dramatically. This time last year, 500 litres of oil to heat your house would have cost you €450. Today, it’s €230. Irish motorists are saving more than €380 a year on average because of the more than 60 per cent drop in oil prices.

Households and businesses are winning in the short term. But this too is a bubble. We should know what happens when bubbles burst.

So let’s recap: unemployment is falling. Inflation is not a problem. Growth is resurgent. Debt levels for households and the government are falling. Trade with the rest of the world is growing. Migration is not a daily issue obsessing policy-makers.

You might well ask: crisis? What crisis?

What European crisis?

Zoom out from our little island in your mind’s eye. Pretend you’re in Google Maps. Move out past Britain, up above Europe. Europe is in a bit of trouble. The Nobel Laureate Joseph Stiglitz wrote about this in 2010 in his book Freefall. With insufficient aggregate demand – meaning everyone queuing up to buy and sell stuff – Stiglitz warned we would see a Great Malaise coming soon after the Great Recession caused by the 2008 global financial crisis went to the great economics textbook in the sky.

Europe’s Great Malaise comes primarily from the euro, the rules insisting on austerity for some and full repayment for others, and an understandable (if incorrect) aversion to fiscal stimulus for the periphery on the part of the countries of the core. The single currency locks in a kind of deflation in poorer peripheral countries, but also within richer ones like Finland, whose ministers have openly admitted it was a mistake to join the single currency.

Worse still, Germany, the largest economy in Europe, is running a persistent current account surplus, the largest in its history, which is stripping demand from its neighbours at a crucial time when investment is most needed, as waves of migrants cross the borders of the richest countries the world has ever seen, looking for better standards of living for their families.

In 2016, you can expect more than 60 million people to be on the move, more than the population of France. The UN’s refugee agency estimates 4.6 million Syrian refugees alone are on the move today.

Read that again. That’s the population of Ireland. Imagine all of us – every single one of us – walking out of our homes, to an uncertain future in a foreign country. And that’s just Syria. To date, the Irish government has received requests from 20 of the 4.6 million on the move. Just 20. Ireland has, in total, accepted 114 Syrian refugees under the previous Syrian Humanitarian Admission Programme. Europe in total has had just over 800,000 asylum applications from Syrians alone.

The figure shows just how quickly the issue of mass migration has become an active policy issue for Europe. Without measures to increase stability in the Middle East, the migrant movement may challenge what we understand the nation-state to be.

What migrant crisis?

This year, we are seeing the results of Russia extending its regional power play to Syria and on to Turkey, and the Saudi Arabian economy in freefall (they are considering imposing austerity and privatising state assets).

One major engine of progress for our societies since the Industrial Revolution has been our organisation into countries defined by the doctrine of liberal nationalism. This is the idea that you can redistribute progressively from rich to poor using the tax system, but within the nation-state alone.

National solidarity is a deep enough idea to make sure the social classes work together, in service of the common good, which is defined as whatever is important to the nation at that moment in time. Crucially, whatever is not defined as ‘Irish’ doesn’t get access to these resources. This works as long as the population is relatively stable, or is only leaving the country via emigration, as Irish people have been doing since the 1840s.

A very rapid influx of a foreign population influx changes the conditions and the assumptions that liberal nationalism works under, unless citizenship is granted quickly or some other integrative force takes place.

Will this happen with the current influx? No. Take Germany, the fourth-largest economy in the world, with a population of 80 million. As of November 2015, Germany has taken 428,468 people from Syria, 154,046 from Afghanistan, 121,662 from Iraq, 69,426 from Albania, 33,049 from Kosovo, and 285,243 from other places. In total, between 1.1 million and 1.2 million people have arrived on their shores. One-80th of the population.

For Ireland to take a proportional number in solidarity with Germany, we would need to take in 58,500 refugees, enough to fill the Aviva Stadium with 8,000 people waiting outside, listening to the match.

So far, we have committed to 2,600 families – around 4,000 people – or roughly one-1,170th of the population. And a mere 20 have actually shown up. Germany can cope with absorbing one-80th of its population over time. A good question is: what happens if one-80th of its population turns up next year?

Ireland’s system of liberal nationalism will remain as it is. The bigger question is: what does a migrant crisis taking place over the next ten years mean for the systems that European economies have built around the ideas of liberal nationalism?

What inflation crisis?

There is little or no inflation in the developed world. Inflation is only 0.2 per cent in Europe and 0.5 per cent in the US. In fact, if you rank the 189 countries and territories the World Bank keeps inflation data for, only 43 of them have inflation rates above 4 per cent, and none of them are in the rich global north. This is a sign that something is amiss, perhaps even a crisis.

Inflation, the only thing the ECB is legally mandated to care about, is not expected to rise above its targeted 2 per cent until my five-year old is going out to discos. This is precisely what you might expect when interest rates are very, very low, but the idea of interest rate normalisation is starting to be discussed in the US. No chance of that happening in Europe. There are a series of deep structural imbalances in Europe which, one way or another, will be resolved over the medium term. Debt and its resolution, deleveraging, have taken place from the heights of 2008 across most sectors in Europe, but not as fast as it might have. However, don’t go reaching for the shotgun shells and buying gold just yet: inflation is not going to be preceded by hyperinflation, where prices explode and society breaks down.

What oversupply crisis?

The very low levels of inflation are symptoms of the world economy’s slowing down, an intense level of oversupply in certain key sectors, and the collapse in the major commodity exports of regions like the Middle East and China’s slowdown. The supplies of global labour and investable capital are great, and demand too weak.

Some simple examples of the kind of global oversupply I’m talking about: China’s steel industry has 400 million tons of excess capacity. Real estate Inventories grew by nearly 50 per cent in two years to 718 million square metres at the end of 2015.

Across the world, oil is now so far below its price of production that countries relying on sales of the stuff to make money are, to use a technical term, bunched. It costs Iran around $107 to pull a barrel of oil out of the ground, process and store it. And they will get less than $30 for that barrel today. Prices just can’t go up in this environment. And price growth isn’t the only thing out of balance.

What imbalance crisis?

It might sound stupid to say it, but the economy does not tolerate unsustainable processes forever. One source of these imbalances is the current account.

Current accounts are very, very important. A nation’s current account is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. When current accounts are in surplus, it typically means money is flowing into an economy. Deficits mean money is heading out. My deficit is your surplus, and you can use your surplus to buy my stuff, which would even things out, which is a mechanism that John Maynard Keynes wanted us to build into the international system after World War II. Once the rich nations realised they’d have to spend “their” money, the proposal got the flick. Current account imbalances build up for lots of reasons, and through several channels.

The situation looks like this across the major areas of the world, plotted from 2000 to 2020, using the IMF’s highly unreliable forecasts from 2016 to 2020. Not just pinches but barrels of salt are required here, folks, but they are the best we’ve got. Expressed as a percentage of gross domestic product, you can see how the external wealth of groups of nations have fared, including sub-Saharan Africa, the Middle East, the rich G7, and the emerging markets (see accompanying graph).

You see a few major changes. First, the Middle East is always in surplus, thanks chiefly to oil revenues flowing into its nations, until 2015, when things turn around for them. If you study macro economics for long enough, you see sharp shifts in series like this quite a bit. For the people who live in Saudi Arabia and those who run its economy, it must feel like being on top of a marble rolling off a table. The EU is muddling along, barely above zero, after 2008.

Look at the chart again. The poorest nations on earth scrape by, with emerging markets continually volatile.

See how things have changed in such a short space of time. Five years ago, Brazil was a world-beater. Now, weighed down by collapses in the prices of its major exports, with inflation over 10 per cent, a series of political crises and the prospect of a stronger dollar all through 2016 to contend with, things are not looking so hot for our Brazilian friends. The ASEAN-5 economies of Indonesia, Malaysia, the Philippines, Singapore and Thailand boomed throughout the 2000s, but have been mired since 2009.

Current account imbalances usually resolve themselves in messy ways. Persistent deficits tend to leave economies fragile to “sudden stops”, when the money from abroad runs out. Persistent current account surpluses are a sign you’re not spending when you should be. And when things turn around, the economy suffers greatly, as we’re seeing in the Middle East today.

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Global growth is slowing. China’s real gross domestic product growth slipped to 6.9 per cent last year, the lowest in 25 years. More on China in a bit. First, let’s compare two examples to Ireland: Indonesian growth rates have been at, or around, zero for nearly a decade. Brazil’s as well. Now look at Ireland’s growth rates in the same period, overlaid on Indonesian and Brazilian ones. Astonishingly high, astonishingly low, and now astonishingly high.

You can guess what might come next. You might think it’s incorrect to compare a highly developed open economy like Ireland’s to a large, developing economy like Indonesia or Brazil. I agree they are structurally dissimilar. The point I’m making is that, when it comes to the volatility of growth, Ireland tends to make even these countries, typically bracketed as volatile countries, look positively calm. But it’s the kind of calm you see after a middle-aged man discovers a meditation app for his smartphone. Ultimately, we know it will all go a bit wobbly.

Global growth is expected to come from just a few countries – notably a resurgent US – but still it will be weak in 2016.

Without growth, the debt problems the world has can’t be solved. Without growth, living standards of the poorest won’t be lifted. World growth was estimated last week by the IMF to be 3.1 per cent in 2015, and is projected to be 3.4 per cent in 2016 and 3.6 per cent in 2017. Worse still, inequality gets in the way of growth distributing its dividends across the population. You can’t count on growth to raise living standards if most of it goes to just a few households. Rich countries have a fair bit of inequality, but tend to redistribute that wealth pretty well. Joseph Stiglitz’s Global Malaise means the redistributive element won’t take place to the same extent. As global inequality increases, the ability of countries to spend their way out tends to get weaker – meaning we can expect a tougher time in the coming years, especially if states are unwilling to do really activist fiscal policies and large-scale infrastructural spending.

Last week, Oxfam’s inequality report drew attention to the rather damning fact that the top 62 people own as much wealth as the bottom 3.5 billion people in the world’s income league table. Meanwhile, in Ireland, we have come back full circle to the unrealistic expectations of the mid-2000s, fuelled by a forecasted 6.2 per cent growth in 2016 and talk of renewed property speculation and a return to mid-2000s levels of investment.

What investment crisis?

Textbook macroeconomics tells you that investment should equal savings. The reality is far different. The chart below subtracts savings from investment as a percentage of gross domestic product for a group of countries. (This isn’t a perfect measure, but it will suffice.) You can see that in the Middle East, investment is much less than saving until 2014, when, pretty much all of a sudden, things reverse.

Meanwhile, sub-Saharan Africa and the ASEAN-5 are powering ahead post-crisis. Note how stable everything else is: the major economies, the EU, even emerging markets.

I expect this will change as the ripple effects of China’s slowdown, the disruption in oil markets and across other financial assets like commodities and equities continues. Here in Ireland, investment minus savings boomed as money flooded into the economy from abroad. Very few people saved anything. That all reversed in 2008, and investment won’t be close to equalling saving until 2020.

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So this is 2016. We have sluggish growth; little to no inflation; and imbalances in saving and investment, in demand for goods and services, and in trade, financial and migrant flows.

What ties all these disparate elements together in one narrative? Nothing, if not the notion of structural change. The world of the Washington consensus in the 1990s is gone. The global economy is absorbing the effects of large parts of the global south moving from very poor to middle-class. It is absorbing the changes wrought by a realignment of economic and political power, as the new reality of China moving towards a service-based, consumption economy, and a new global middle class, takes hold. They have savings which will change the face of modern finance.

They have skills and a new mobility, facing a rich and ageing global north. They may reinvigorate the pace of new and fundamental technical change, which economists like Bob Gordon worry has slowed.

But even the Chinese can’t stop the fundamentals of economics: economies boom, they bust. As China’s economy declines, the world will adapt. 2016 will be the story of what form that adaptation takes.

In Ireland, our political classes can still trumpet our recent recovery, but that bubble can’t last for too long. We’re too small. We won’t be able to ask: “What crisis?” for ever.