'The Biggest Risk to the Global Economic Recovery Is...' Monday, Aug 24, 2020
An exclusive Q&A with Arvind Chari - Head of Fixed Income and Alternative Investments, at our Sponsor company, Quantum Advisors. Arvind's vast experience in managing money for global investors and his interactions with leading institutions has exposed him to a world of knowledge. With over 18 years of experience in tracking the domestic and global economy, he is Quantum's thought leader and this is why we brought him in as a guest speaker to answer the below questions on the global economic recovery....
1. Tell us how the global economy has been performing in recent years, and how has Covid-19 derailed that?
The global economic growth in this decade has been much lower than the 2000s. Prior to COVID, the US economy had its longest stretch without a recession but yet the GDP growth level never sustained above the 3% level. China, the other large driver of global growth was attempting a structural transformation of its economy which led to its growth falling below the 6% level. India as you are aware has had its worst growth performance since the 1980s, where the decade average growth was below its potential level of 6.5%. So, we have had growth but below potential.
2. One way in which governments and central banks have dealt with this crisis is spend and print money respectively. How has this impacted global liquidity and interest rates? How long is this likely to sustain?
The global central bank action has been unprecedented and the immediate impact has been on interest rates. Most developed world central banks are at zero rates or negative. Their bond purchases (Quantitative Easing - QE) has let to Global bond yields at such low levels that fixed income instruments no longer offer the portfolio protection it is supposed to. The central banks have run their course.
It is time for the government to support the recovery. We have seen a large increase in fiscal deficits across the world with governments stepping in to pay salaries, provide food and support businesses with liquidity. We hope it sustains, as individuals and private business impacted by COVID are unlikely to be able to invest and create jobs and income.
The governments though will be challenged; either by the instability that high debt levels cause or by high inflation or both. Thus, the risk to the global recovery is that governments will be forced to cut back on its spending.
3. In recent weeks and months, the US Dollar has become weaker when compared to currencies like the EURO and others. This has led many to speculate that the end of the US Dollar as a Reserve currency may finally be happening. Please explain what this is all about, and your take on this ?
A weaker dollar does not on its own mean that the US dollar will lose its reserve currency status. Global trade and investment remains in US dollars. The alternative is the Euro or Chinese Renminbi, but a reserve currency needs to issue assets which the others would want to own. For now, US dollar and US Treasuries are the only large liquid option available.
The difference between US interest rates and growth as compared to the Euro area or other countries has reduced and that has led to the depreciation in the US Dollar. This may persist and we may see a weaker dollar. Currency markets though tend to be volatile and are never a straight line consistent trend.
The decade of 2010's generally saw a strong dollar and this might be the decade where the dollar isn't that strong. This tends to be good for Emerging Market as investment flows move from dollar to EM assets.
4. When do you see this trend of de-globalization play out? How will it impact global economic growth?
The days of co-ordinated globalization seems to be over. That doesn't mean we won't have global trade. It means that governments across would prioritise inward looking, domestic policies over say free trade, liberalization. We are seeing that in the US, in China and with the 'AtmaNirbhar' stand in India.
The global growth and prosperity of the 1980s till 2007 was as a result of free trade and investment, easier movement of goods, labour and capital. Its fault lines showed up in the financial crisis and its aftermath. As large countries determine their domestic focused policies, it is likely to be a period of high uncertainty. We already see instances of domestic favoring policies taking on a nationalistic flavor which can complicate matters.
5. When do you see the global economic growth pick up? What are the indicators one should track for signs?
COVID is not a financial crisis; it is more akin to a war like situation. In war, you have destruction of assets and property; COVID led to destruction of income. The response then has to be to support firms and buffer people's income.
With the increased government spending and low interest rates, you will get a pick up and recovery. The important thing is will it be sustainable. Efforts and policies to expand employment opportunities and to increase wages and income will be the key for long-term recovery.
In the short run, apart from the high frequency indicators like tracking electricity consumption, global purchasing managers index (PMI), auto registrations, housing sales, unemployment data etc. we can also get a sense of activity from google search trends, digital payments, retail sales data.
If you hear, Central bankers getting confident and signaling no need for rate cuts and/or removing accommodation, it will be a good sign for real economic recovery. However, given that financial markets are so much dependent on central bank support, this action may cause volatility in financial markets and needs to be communicated carefully.
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