An outlook on growth

What are the most important economic issues G20 leaders should address at Buenos Aires?

It’s the same basic question leaders should address at all meetings: how to keep sustained, low-inflationary growth moving forward.

What is the current state of the global economy?

We’re at the strongest growth rate in about 10 years. It’s a wide-based, multi-country expansion, with the United States back as a locomotive at around 4% growth this year, likely 3.5% next year. Europe is beginning to slow but has had a relatively decent year. Global trade is going to grow.

What major risks does the global economy face?

Removing the almost-zero interest rate policy in the developed countries, shifting to a more normal yield curve with positive real interest rates and tightening monetary policy – if not done smoothly – will shake confidence in markets and economies.

Might the United States tighten monetary policy and even the European Central Bank?

I’m more confident that the Federal Reserve will follow a steady-as-you-go path that won’t do too much too soon. The recent gradual tightening has shown it can be done without major disruptions. They learned their lesson two years ago when they did not show their future plans for interest rates and markets got upset. I’m not quite as convinced the European Central Bank will be as careful.

With US inflation already near the 2% target and no slack in labour markets, is there a danger of inflation?

It’s a delicate balance between letting inflation return to historical 2–2.5% levels and tightening monetary policy without tightening too much too soon or too slow. Forecasts suggest inflation around 2–2.5% through 2019. So I’m not too concerned that despite firm labour markets we’ll maintain extensive inflation that will cause the Fed to overreact.

Is there a risk now that we’re seeing financial crises in emerging markets again?

One major mistake of recent zero-rate policies has been over-borrowing. Several emerging markets borrowed extensively and, as interest rates grew, ran up large debts. You’ll see pressure on those economies to get their debts under control. There’s a risk of considerable tightening of credit to other emerging markets. It is more interesting to see what might happen in Italy or Greece, though.

Might rising oil prices inhibit economic growth?

No question: $100 per barrel would dampen global growth. But with shale oil in North Dakota and Texas and new modes of extraction, as prices rise, more new well drilling and exploration will take place because it’s profitable at those prices. With the United States now a global supplier and net exporter of oil, any level sustained at $100 a barrel will bring new supplies. Given Saudi Arabia’s need for increased revenues and attempts at restructuring, it may loosen the spigot a little. I’m less confident the Russians will play the game because they want maximum dollar revenues.

Will the United States continue to be a locomotive of global economic growth?

Growth will likely slow to a solid 3% – more than the 2% everyone said was the new normal for the United States. With deregulation and tax reform, we have stronger underlying growth, so I think we’ll stay in the 2.5–3% range. Given our propensity to import, it’s a fairly strong impetus for global growth.

Many economists including the Council of Economic Advisors argued that the combination of deregulation and tax reform would stimulate growth in this range. The digital revolution is also a strong impetus, and will expand to other countries. Certainly, China and Korea are leaders in such areas.

How serious are escalating US-China tariffs?

The real question is whether the trade reforms are net positive and overcome the temporary shortfall caused by the current disputes. In other bilateral talks, the high tariffs have been quickly removed as negotiations moved forward. It’s clearly considered a tool in successful negotiations. So it’s too early to tell what the net effect of higher tariffs will be. China has maintained barriers to trade and investment globally and any progress made by the US administration in opening that market for the rest of the world is a net positive.

Is the Trump administration’s apparent preference for bilateral or plurilateral trade agreements a stimulus?

President Trump is clearly making more progress than his critics expected. We’re not in a global trade war. Net-net economies will benefit from that progress. I think the United States, Mexico and Canada will gain from the firming up and expansion of their revised agreement.

Are there other locomotives emerging to help support today’s vibrant global growth?

I’ve never seen an alternative to the US economy in terms of direct effects on global trade flows. China is clearly growing, but its lack of openness, transparency and direct investment openness means it is not the engine for growth it could otherwise be. It has always been possible for the G7 members without the United States to be a locomotive if they synchronised, but we’ve not seen that in recent decades.

Is there a rationale for G20 leaders to discuss monetary policy coordination and exchange
rate coordination?

Maybe, along with a discussion about regulatory reform and the freedom of markets from excessive regulation. You could tie in a discussion about the freedom of price movement including exchange rates, which could provide a mode of discussion different from directly attacking their own central banks.