The global economy seemed to be on the mend when the IMF met for its spring meeting in Washington 10 years ago. Then-US Federal Reserve chairman Alan Greenspan had cut official interest rates in the US to 1 percent after the collapse of the dotcom boom and the world’s biggest economy had responded to the treatment. Former British prime minister Gordon Brown was then the UK’s chancellor of the exchequer and the country was in its 12th year of uninterrupted growth.
Companies in the West were flocking to China now that it was part of the WTO. The talk was of offshoring, just-in-time global supply chains and integrated capital markets. The expectation was that the good times would last forever. No serious thought was given to the notion that total system failure was just around the corner. Faith in the self-correcting properties of open markets was absolute.
When the crash duly came in 2008, a self-flagellating IMF confessed that it had been guilty of groupthink. It had either ignored the signs of trouble or played down their significance when it did spot them. The fund has learned some hard lessons from this experience. Downside risks to the forecasts in its half-yearly World Economic Outlook are now exhaustively catalogued.
The world of 2014 is not dissimilar to that of 2004. The boost provided by cheap money has got the global economy moving. Inflation as measured by the cost of goods and services is low, but asset prices are starting to hum. Financial markets have got their mojo back. Deals are being done, big bonuses paid. The received wisdom is that the worst is over and that the prospects for the global economy will strengthen as the remaining problems are ironed out.
Some analysts believe that the Great Moderation — the period of low inflation and continual expansion — has returned after the hiatus caused by the crash.
The optimists could be right. Recessions tend to be the exception rather than the norm and countries eventually revert to a trend rate of growth. In the UK it is 2 percent or so; in the US it is a bit higher; in the eurozone a bit lower. This could be the start of a long global upswing built on technological change and the advent of middle-class spending power in fast-growing emerging market economies.
Or it could be another case of groupthink.
Imagine, therefore, that in five years’ time the IMF is doing its postmortem on another period of global turbulence. What will it say were the warning signs missed during 2014? Here are five to be going on with:
The first is the global economy’s dependency on exceptionally low interest rates. Since peaking in the 1970s, the trough in interest rates has been lower in each subsequent cycle and they are now barely above zero. Countries such as Britain and the US have only been able to revert to their trend rate of growth through periods of looser and looser monetary policy. As British businessman Adair Turner noted in a lecture to London’s Cass Business School in February, this has averted the threat of secular stagnation — but at a price. The recovery engineered by Greenspan was a case of “the hair of the dog” and the same applies in spades to the one since the Great Recession of 2008-2009.
The second threat is a bond-market crash as the world’s central banks try to return monetary policy to a more normal setting. Central banks are adopting a cautious approach to this process, with the Federal Reserve gradually reducing the amount of bonds it buys under the quantitative easing program and the Bank of England using forward guidance to reassure borrowers that any increase in official interest rates will be modest and gradual.