When growth depends on a lack of interest
OECD economies need a gentle touch from the central bankers, says Richard Freeman
Sunday 25 August 1996
Economists have claimed that the slowdown in growth is merely a pause as the industrialised world catches its breath before accelerating again. The episode has been compared with the growth pause in 1986. The main difference this time round is that stock levels were much higher at the start of this pause than in 1986. Also, this pause has lasted longer.
But the comparison is wrong for two other reasons. First, the 1986 pause affected only industrial production and not the whole OECD economy as it has this time round. In 1986 OECD GDP rose by a solid 2.8 per cent. Second, with the exception of 1994, OECD GDP has grown well below its longer-term trend since 1990.
Since 1990, the OECD area has grown at an average annual rate of only 1.5 per cent which is a particularly dismal performance. With such weak growth it is no surprise that unemployment in the OECD area has risen to unacceptably high levels.
To a large extent, the slowdown in growth, particularly severe in Europe, reflects the emphasis of policy in many OECD countries on both fiscal rectitude and stable prices. Both are very desirable aims but it is reasonable to query whether the quest for stability hasn't gone too far, too quickly. Most important, I query whether monetary policy in some major countries has been too much focused on stability against a setting of restrictive fiscal policies.
In answer to this question, most forecasters and financial markets are saying it hasn't. So are the leading international organisations such as the IMF and the OECD.
Almost universally, the experts are saying the pause in growth in the OECD is over. With the strong growth of the US economy in the second quarter, the emergence of Japan from a major recession and increasing indications of recovery in Germany, both the IMF and the OECD area are forecasting a stronger performance in the second half of this year and an acceleration into 1997. Trends in the UK add weight to this assessment.
The predicted acceleration in growth is admittedly not strong but it is nevertheless significant, with the OECD economy expected to expand at a rate of around 2.5 per cent from mid-1996 to the end of 1997. Many private forecasters are more bullish than the IMF or the OECD, especially for the UK.
There is no doubt that the outlook in the OECD area is looking brighter in the second half of this year than it has over the last year. But will the forecast pick up in demand, will activity be sustained into 1997 and will 1997 see near or above trend growth rates? I would not put a great deal of money on it.
With fiscal policies mostly remaining restrictive, a great deal depends on what central banks in the major economies do in the next few months. What happens to monetary policies is the major uncertainty in the outlook.
My hesitation about the strength of the acceleration into 1997 in the OECD area stems from the obsession with inflation of, mainly, central banks in Europe and Japan. I believe central bankers have mostly been concerned about inflation for far too long. The one possible exception is the Federal Reserve.
The main culprit in my view is the Bundesbank which, after all, dictates monetary policy throughout Europe. With inflation under 2 per cent and no signs of inflationary pressures for a long time ahead, it is unclear why the Bundesbank continues to fight a war it has long won. It is more than time to call a halt.
Without a significant reduction in the appropriate German interest rates in the near future, there is a real risk that the Bundesbank will kill off the fragile recovery now under way in Germany. A move in Germany away from what is essentially a hard-money policy would certainly be good for the rest of Europe as well as for Germany itself.
An easing of German monetary policy would help the weak southern European countries, particularly as they could follow suit without any inflationary concerns. It would also be a tonic for France whose recovery is still very much in the balance.
The odd man out in Europe is Britain where the Bank of England is calling for a pre-emptive rise in interest rates against future inflation. This call seems to me to be somewhat premature. Inflation is well under control and the economy is growing at a rate of under 2 per cent. A rise late in the year may be in order but it would be premature to act now.
In Japan there is also central bank pressure to raise interest rates. Low as rates are in Japan, a tightening of monetary conditions is the last thing the Japanese economy needs. As in much of Europe, the recovery in Japan is still fragile and any early move against phantom inflationary pressures could easily push the economy back into recession.
The major uncertainty is the US. Increasingly, the commentators are calling on the Federal Reserve to make a pre-emptive strike against inflation. The balance between raising rates and leaving them where they are is a fine one. For the time being I would take the risk of leaving them where they are.
My confidence in the strength of the upswing in the major economies would be very much strengthened if central bankers act along the lines I have suggested.
Richard Freeman is corporate chief economist at ICI.
Actress sees off speculation about her appearance in an amazing way
Review: Despite an uphill climb to see Jake Bugg in action, his performance is notably flat
Powerful images of strays taken moments before being put down
Review: Witty banalities aside, the comedian has an authentic voice
The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon
- 1 Renee Zellweger on plastic surgery claims: 'I'm living a more fulfilling life and I'm thrilled that perhaps it shows'
- 2 Salisbury ranked seventh-best city in the world to visit in Lonely Planet’s Best in Travel 2015
- 3 Disney announces new female-led film Moana
- 4 Banksy not arrested: Internet duped by fake report claiming artist's identity revealed
- 5 Russell Brand threatened with arrest after filming outside Fox News headquarters
Australian jihadist Abdullah Elmir vows Isis will fight 'until black flag is on the top of Buckingham Palace'
Renee Zellweger on plastic surgery claims: 'I'm living a more fulfilling life and I'm thrilled that perhaps it shows'
Chicago voter tells Obama 'don't touch my girlfriend' – Obama stays super smooth
Oscar Pistorius: The brutal prison life that awaits disgraced athlete
Banksy not arrested: Internet duped by fake report claiming artist's identity revealed
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Jose Manuel Barroso warns David Cameron against making 'historic mistake' over immigration reforms
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...
£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...
£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...