‘Great Stagnation’ hardly likely amid great volatility in financial markets

What on earth is Goldman Sachs on about predicting a 40 per cent chance of a ‘Great Stagnation’ for the developed economies? Surely the super-high levels of volatility seen in global financial markets suggest anything but that. There will be winners and losers and Goldman will doubtless want to be on the winning side.

The Wall Street titan says trends in the US, UK and Europe (Japan is already there) indicate a period of stagnation that comprises growth of around 0.5 per cent, rising unemployment, stagnant house prices and lower returns on stocks. Their economists found that in 150 years of macroeconomic history the probability of such stagnation is much higher after major financial crises like that of 2008-9.

Call for reform

Only government policies to reform economies and restore confidence could save the US, Europe and UK from this fate, they conclude. But these countries are only a part of the global economy, and account for a smaller and smaller share of the whole.

What of fast-growing China if the rest of the world is in hibernation? Will its economy prove to be another emerging market bubble and blow-up throwing tens of millions back into dire poverty? How will they respond to that experience.

Or will the emerging economies take on the mantle of global growth and continue their amazing expansion of the past decade without the help of debt-fuelled developed economies? It is certainly hard to imagine that they will be able to do so at the same pace with lower levels of global demand and investment.

Take the Middle East. A ‘Great Stagnation’ would slow demand growth for oil and keep its price down to lower levels than over the past year. Or will it? The developed economies have not been in sparkling form for the past three years and yet we have the highest oil prices and oil revenues in history.

Commodity prices

Will the policy response of the developed nations to a ‘Great Stagnation’ not be more and more money printing and higher and higher commodity prices? After all such lose monetary policy and inflation is acknowledged as the only real way to purge the financial system of its excessive debts, and we already see inflation rising while economies are stagnant.

That would seem to imply a very different growth outlook for parts of the world supplying the increasingly expensive commodities but that would at the same time dampen growth in the developed countries. Places like Brazil, Russia and the Oil States would still prosper in relative terms.

You might then have a very different growth hierarchy among nations. ‘Great Stagnation’ (or in reality further decline in many sectors and growth in some) for the developed countries, a nasty recession in the bubble emerging economies like China and India and moderate to high levels of growth in Brazil, Russia and the Oil States or for that matter advanced commodity economies like Norway, Canada and Australia.

Of course, if the downturn in China proved particularly sharp then it could bring the commodity producing countries quickly to their knees as well, and that would be a global depression and not a ‘Great Stagnation’. Goldman has sparked a lively debate but we should be aware that stagnation is usually an illusion with winners and losers rather than a true equilibrium.