WEEKLY COMMENT 21-11-2013
By Barry Edwards
OECD and the new world of finance
The Organisation for Economic Co-operation and Development (OECD) has released its forecasts for 2014/2015 and the comment about the UK is reassuring in this report. The Chancellor of the Exchequer has instantly picked this up to promote his economic management skills and who can blame him! You can see the relevant UK section in the report by clicking on the link below;
The report states that the global economy continues to expand at a moderate pace, with some acceleration of growth anticipated in 2014 and 2015. This growth has been affected by three events which occurred during the summer; the first is the announcement of the intention to start tapering asset purchases by the Federal Reserve, the second is the effect this had on emerging markets and the third is the disruption caused by political disagreement in the USA over government borrowing limits.
The report also states that the problems that have afflicted the EU have subsided although these could flare up at any time and the ongoing capital shortfall of the banks continues to be a brake on growth. In the main, the OECD is positive on growth continuing but warns any of these problems highlighted above could cause serious disruption. If you have some time to spare, it is well worth reading the summary at the beginning of the report since it sums the situation succinctly.
In my view, this report is encouraging for an international institution despite the caveats that are mentioned. It certainly confirms the experience many people are describing concerning the level of confidence in the business community and the noticeable increase in commercial activity. Personally, the return to growth does not feel the same as it was from previous recessions in the sense that it is much more restrained. I believe there has been a fundamental change in the makeup of the economy which will have long lasting effects for many people and the implications this will have on the financial lives of all of us is still uncertain.
Many economists including Lawrence Summers, the former Treasury Secretary and Martin Wolf from the Financial Times have warned that this new economic world we find ourselves in is not going to be like it was prior to the financial crisis. The main reasons they give for this view are that the recovery has been very weak since it erupted in 2007/8 despite the vast sums of money printed by the central banks to purchase government and corporate/ mortgage bonds.
Secondly, today’s crisis-hit economies experienced rapid rises in leverage (the ratio of debt to assets and income) particularly in the financial and household sectors which did not create above trend growth or inflation. Thirdly, long-term interest rates remained unusually low in the years before the crisis despite the strong global economic growth which was greatly influenced by the emerging markets.
The structural weaknesses that existed prior to ‘great recession’ are the main reason for the slower than usual recovery now and the global savings glut that this dysfunction created cannot find profitable investment opportunities to provide satisfactory returns. We are consistently hearing that financial institutions cannot generate the income to pay pensioners and savers over the long-term which has reduced the expectations of many people for their retirement.
Another indicator of the savings glut was the huge current account balances (exports over imports) that many countries generated some of which found its way into unproductive investment products in the financially developed economies that decreased in value substantially during the crisis.
The main point being made here is that all this enormous wealth could not be utilised by productive investment opportunities and ultimately created an enormous asset bubble that was unsustainable. The financial system that we have is not capable of creating the investment opportunities to effectively utilise the funds available. Therefore, unless a big change occurs in the way financial institutions react to the demands of business to make capital investments and the funding of infrastructure, the whole cycle will happen again and probably more often than in the past as the emerging countries become wealthier.
It is clear that something has to change and the political will to force the banking sector to do that is gradually beginning to emerge. There has to be a new approach to how funding institutions work with companies to create the employment and utilise the resources available much more effectively. This will inevitably mean that close associations between financiers and companies will need to develop so that a growth plan for those companies that have the ability to expand can be devised with the knowledge that the funding will be provided assuming all goes according to plan.
The diverse skills and experience that already exists within the financial community and those associated with it will have to merge to provide the facilities these companies will require to create the environment to employ more people productively and grow both emerging and developed economies in a more enterprising new way. Currently the financial world is a not structured to manage this and the people who could make it happen have not yet shown themselves. With the Internet providing many possibilities, it is likely these promoters will come from outside the financial arena. The next ten years will be an interesting time for the world of finance.
That’s all for this week, more observations next week.