WEEKLY COMMENT 6-10-2016
By Barry Edwards
World Economic Outlook
The IMF twice yearly World Economic Outlook, Subdued Demand, Symptoms and Remedies has been published this week coinciding with their annual gathering in New York. As usual, it is a very thorough and detailed document presenting the facts and solutions to the world economy. It is a very lengthy document but it is worth reading the executive summary which is 4 pages, if you click on the link below you can read that section and the rest of the report if you have the time;
Below is an extract from the first part of the executive summary;
“Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favour of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer. Although the market reaction to the Brexit shock was reassuringly orderly, the ultimate impact remains very unclear, as the fate of institutional and trade arrangements between the United Kingdom and the European Union is uncertain. Financial market sentiment toward emerging market economies has improved with expectations of lower interest rates in advanced economies, reduced concern about China’s near-term prospects following policy support to growth, and some firming of commodity prices. But prospects differ sharply across countries and regions, with emerging Asia in general and India in particular showing robust growth and sub-Saharan Africa experiencing a sharp slowdown. In advanced economies, a subdued outlook subject to sizable uncertainty and downside risks may fuel further political discontent, with antiintegration policy platforms gaining more traction. Several emerging market and developing economies still face daunting policy challenges in adjusting to weaker commodity prices. These worrisome prospects make the need for a broad-based policy response to raise growth and manage vulnerabilities more urgent than ever.”
Although Brexit was forecast to have a bigger impact on the world economy than it has, the uncertain consequences still linger. Despite that the IMF are forecasting a small improvement in world trade growth which has to be encouraging for markets and business. All the major economic forecasting organisations and many other commentators are attempting to influence politicians to begin government spending on infrastructure within budget limitations in conjunction with structural reforms.
The politicians are beginning to discuss plans to invest in their economies in most developed countries but apart from the EU with their ‘Juncker Plan’ there have been been no details revealed yet. The structural reforms vary from country to country; as an example the UK needs to improve education and business/vocational training while the EU needs to reduce the burden of employment on business. There are many other country specific reforms that should be addressed which are too numerous to go into here. However, a strategic plan to implement many of these would benefit all countries and allow business to participate effectively, according to the IMF.
We have discussed the ‘Juncker Plan’ and other techniques of using guarantees to initially fund infrastructure and commercial projects in this weekly comment on various occasions over the last few years. The main point is that all these concepts work by funding projects without incurring further government debt. They are separate entities that fund the initial construction phase and then issue bonds in the markets which in the case of infrastructure without direct cash generation are funded by government annually. This means the amount of investment can be geared up substantially helping to expand the economy and generate badly needed tax revenue to pay for the extra government expenditure.
The purpose is to allow inflation and the variation of interest rates over the 30 to 50 years until maturity of the bonds to have their effect and make the repayment much more manageable at that time or even during the period of higher interest rates which reduces the capital value of the bond. It is perfectly possible for the entities issuing the guarantees and the bonds to be responsible for repayment providing governments pay between 1 and 2% extra per annum on top of the interest rate of the bonds, with interest rates at these low levels that would not be an onerous burden. This would remove the obligation of the debt entirely from the government balance sheets allowing for the high debt countries to substantially reduce their government debt.
It is quite likely politicians have realised the potential of these techniques and will adopt this method of funding projects in the future. Since I have not read the entire IMF report, it is 200 pages long, I am not sure if that is mentioned somewhere within it or not. However, it makes perfect sense and if enough commentators and economists keep suggesting this method, it may be widely adopted. Let’s hope the message gets out there and is heard in the right quarters.
That’s all for this week, more observations next week.