A Slow Transition

A Slow TransitiontcbrPDF normal

Economist Bart van Ark sees global growth picking up speed—just not as fast as anyone wants.

By Matthew Budman

A Slow Transition

Matthew Budman is editor-in-chief of TCB Review.

ark"The growth performance in mature economies will improve in 2014, but that doesn’t mean we’re out of the woods yet." After a disappointing 2013, hampered by corporate hesitancy and political paralysis, the global economy could use clear direction and stability, but that’s not happening. Yet things will look somewhat brighter in the mature economies, especially in the United States, projects Bart van Ark, chief economist of The Conference Board. It’s the rest of the world—those countries whose rapid growth has driven the global economy—that are looking a little shaky going forward. "In the emerging markets, particularly in China, we’ll see a lot more volatility," van Ark says. "And you need to prepare for that volatility."

For 2014, The Conference Board projects global growth improving to 3.5 percent, with the Euro area moving into positive territory and the U.S. economy picking up from 1.9 percent to nearly 3 percent. As China’s transition continues, its growth will likely slow, to a still-hot 7 percent; India is seen as staying stable, growing slightly faster at 4.4 percent; Latin American countries will pick up a little, from 2.4 to 2.7 percent.

With economies facing a wide range of obstacles, and plenty of political and social turmoil, the key to long-term recovery is strengthening growth drivers; this demands that business and government join forces to better direct public and R&D investment and goose productivity. Granted, after witnessing the last year’s self-inflicted wounds in Europe (austerity) and the United States (government shutdown), skepticism is practically mandatory. But van Ark is confident about long-run prospects: “Ultimately, the economy will pick up, but the question is when, how, and where.”

In the couple of months since van Ark’s original 2014 forecast, The Conference Board has pulled back a little on expectations for the U.S. economy, seeing some weakness based on unfavorable weather—both the record heat in the West and the record cold in the East. In addition, we’re seeing more volatility than anticipated in several emerging markets, particularly in Latin and South America, mainly due to the effects of monetary tightening.

 

For five years, people have been asking, "When will things get back to normal and resume high growth?" Is it time to tell them to stop asking?

I've always argued that "the new normal," which people started talking about after the recession hit in 2008, is not a good way to think about adjustments after a crisis. There is no new normal: Economies undergo continuous adjustments, partly cyclical and partly structural. Every time is different. When you start thinking that you have arrived at normality, things start changing again. When businesses sit still, they fall behind. We need an environment that allows for making those adjustments in a world of continuous uncertainties.

History tells us that it takes about ten years to leave the impact of an economic or financial crisis as we experienced in 2008 behind us. But growth will surely pick up—the question is when, where, and how.

Considering your long-term projections of slow growth, that sounds awfully optimistic.

Well, you are correct that the model we use for our projections tells us that the long-term trend suggests a slowdown for the world economy. Slowing population growth in most economies plays a big role, and the trends in investment and productivity are not moving in the right direction. But that can all change to the positive, if the right actions are taken: If we can take advantage of ongoing demands from rising middle classes in emerging economies, if we make the investments to deliver on those demands, and if reforms are made so that investments don't get locked up where they don't generate much return, then there is a good chance that we can bend the slowing curve.

You write that both mature and emerging economies "are dramatically restructuring to adjust to a slower growth environment" over the next five years. But are they really restructuring? It seems more like every country is stumbling along without much planning at all.

Yes, there is a lot of adjustment ongoing, much of it under the radar. It feels chaotic and uncoordinated. But if you allow experimentation, let newcomers in, and accept failures of incumbents, it surely creates upside opportunities for growth. Restructuring can be very messy. And in the middle of this, companies need to set themselves up to capture the resulting phase of growth, when it comes.

I think healthcare reform in the United States is a good example. There are few who wouldn't argue that we need some real, disruptive changes. Reform obviously isn't going smoothly, and we'll need to find out whether the current policy change is the plan that will ultimately work or whether it will need to be overhauled by another plan. But we'll end up in a better place than where we were.

The same is true in the banking sector—there's a massive restructuring going on there as well. The Dodd-Frank Act is being executed; the Volcker Rule is now accepted. Globally, Basel III is happening. Many of these changes have negative side effects because banks have to increase their capital requirements to the point where lending is discouraged. But is there anyone who thinks that things were sustainable in the run-up to the crisis? The same can be said of the muddling through in creating a banking union for the Euro Area. Is anyone arguing that we don't need it? Yes, we are in uncharted territory, but muddling through is not a bad outcome for Europe's future.

Now, of course, countries aren't doing enough to coordinate their restructuring efforts. The recent deal at the WTO to cut red tape at the borders is a baby step toward a new multilateral trade agreement but potentially a major impetus to new deals such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. In particular, if China would join the TPP in a serious way, that could be a game-changer.

But all of this is long-term, and as Keynes said, "In the long run, we are all dead." Reading about Japan and Europe and India and even the United States, one gets the sense that political and structural issues are so difficult that things won't be running smoothly for years to come. Or is that too downbeat?

I never said it will be easy in the short term. The obstacles are very real. Take Japan, which has three arrows to stimulate faster growth: fiscal, monetary, and structural reforms. They've shot the first two, which has given the economy a bit of a boost, but they've been struggling with the third—the big one—for a long time. The reason it's so difficult is that those reforms tend to redistribute wealth from elderly people to younger people. That is necessary in order to incentivize the young to take up jobs, be productive, and contribute to the overall economy. But as elderly people are becoming the majority, they are pushing back on this, which is purely rational. So Japan needs charismatic leadership to convince people that the endgame is worth the pain in between.

Europe is struggling with structural reforms because many reforms need to happen at a European level rather than at the level of individual countries. Europe needs to scale up its internal markets to play a larger role in the global economy and to sustain growth and living standards in the longer term. However, as the electorate is very frustrated with Europe and the monetary union, it's hard for policymakers to tell people, "We need more Europe." It's a tough sell politically, and the European parliamentary elections are likely to bring out much more controversy about where to go with Europe. But everybody knows that for Europe to grow again we do need more Europe.

Policymakers are in a difficult position.

We can continue to beat up politicians and policymakers for not doing their job, but really what we need to do is convince electorates that ultimately society will be better off if those reforms are made, that an intergenerational transfer of wealth is in everyone's best interest, that people who are benefiting now may have to give up a little bit more to keep things going. Business should be part of that debate, I believe, and show what it is they can do to create jobs and provide people with a living.

Share

From
The Conference Board

From the Archives

The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.