Friday, December 15, 2017

Key factors affecting 2013 economic growth

Part 2

There are many geopolitical events that can affect the course of 2013 and add instability to the prevailing level of economic uncertainty that is the bane of world economic growth. The conflict in Syria will reach a climax during 2013 and with it, the prospect of a new regime that is unfriendly to western interests. Similarly, a trigger happy Israel could destabilise the Middle East further with a pre-emptive strike against Iran's nuclear facilities. In the China Sea, the standoff between China and Japan could easily escalate as both countries have administrations which are weeks old and increasingly nationalistic.

In Europe, the president of the European Central Bank (ECB) has done what was required to save the euro and indeed the eurozone. He has achieved two things. First, the euro has stopped sliding against the dollar as the exchange rate has recovered.

Second, the cost of the borrowing in the countries most at risk has fallen significantly. But to achieve this, the monetary policy of the European Central Bank and the other "big" central banks, the US Federal Reserve, the Bank of Japan, and the Bank of England has been extraordinarily loose.

They have all expanded their balance sheets (by printing more money and buying bonds) and the intervention rates are all below one per cent and yet, the banking system is still weak. The implementation of the Basle 3, the international regulatory standard, is delayed.

In short, since interest rates are below expected inflation, the credit system in these larger economies is in what can only be considered as a classical "liquidity" trap as described by John Maynard Keynes; interest rates are low with nowhere to fall.

Indeed, Japan has been in this position for some time. In addition, the instability and volatility noted over the last three years explain why major corporations in many leading economies are flush with cash but are unwilling, or unable, to make investment decisions. This helps to explain the severity of the recession and the difficulty in returning to a sustainable growth path.

Further, the expectation that cutting deficits by austerity measures, that is reducing government expenditures, would lead to a return to growth, has so far failed. It has had the opposite, negative, effect of depressing tax receipts and therefore increasing the role of government as a percentage of GDP.

In Greece, GDP has shrunk by 20 per cent and the growth which was projected by the IMF for 2011, 2012, and 2013 is now projected for 2015. Portugal, Spain and Italy are in a similar position. Conversely, widening deficits is unsustainable in the long run.

In the US, there is still time to reach agreement to mitigate the automatic spending cuts which were scheduled to begin on January 1. But it is a slippery slope and the Republican insistence on expenditure cuts will have a reinforcing downward effect, thereby slowing the recovery and is likely to deepen the recession not ease it.

There are limits to the effect of monetary policy and whilst we have seen a wide array of instruments in the larger economies, the effect of softer policies in the form of quantitative easing has been undercut by a demand for liquidity. This explains in part the large unspent cash balances in the hands of conglomerates.

In summary, since the level of monetary expansion may have been reached, there is need for a far more nuanced change in the design of fiscal policy, away from regressive sales taxes and/or regressive allowances, that will facilitate a gradual easing towards a more consistent growth path.

In the case of Trinidad and Tobago, easy monetary policy is a nonstarter as it leads only to capital flight or an increase in imports. Sales of foreign exchange by the Central Bank have not been sufficient to satisfy demand even when volumes have been increased.

This fact in large measure explains the move by the Central Bank to modify its method of distributing of foreign exchange from the allocation method to an auction method. This change was announced in the Central Bank's last economic bulletin.

So where do we look for growth to stem the tide of falling national income? Expanding the fiscal deficit has had little positive impact over the last two years. Notwithstanding the best efforts of the domestic private sector, the rate of investment or reinvestment is still too shallow to facilitate a turnaround.

In like measure, despite the promises of increased foreign direct investment contained in the budget speech, the changed domestic energy economics occasioned by the "shale gas revolution" in the US suggests that the level of investment will be both slower and lower than projected and the rapid economic expansion associated with the period 999 to 2008 will not be replicated.

Once the recalibration/maintenance of the gas fields is completed in mid-2013 there will be some return to growth. But this growth path will be much slower and to remain sustainable, will require considerable change in our fiscal policies and the rate of growth of the private sector.

Mariano Browne is a former

government minister. Part I appeared on December 29