Governments must cast aside the tired old tools of monetary easing and consumption-driven demand, and reach for what the UN calls transformative growth. Climate change, public health and digital infrastructure are areas of potential growth, requiring massive investment.
It is hard to imagine that the global economy, with the exception of China and a few others, will enjoy anything beyond a dead cat bounce next year. This does not appear to have sunk in yet with many people – stock market investors especially – who are hoping for a fairly robust recovery in 2021 and beyond.
But this is not going to happen. What is needed is what the United Nations referred to in a recent report as “transformative change”.
We face a new economic reality, with growth restored only by renewed emphasis on capital investment rather than consumer spending, and it needs to be spending on human as well as physical capital, according to the UN Economist Network’s analysis.
According to the OECD, the global economy is set to plunge by 4.5 per cent this year, then recover by 5 per cent in 2021 – leaving it roughly back where it was at the end of last year. The US economy will mark time while some European economies will contract for a time.
China’s economy, in contrast, will be almost 10 per cent larger by the end of 2021 than at the end of last year, which appears to say something about the resilience of planned economies. China, likewise, outgrew others during the global financial crisis in 2008/09.
One strength of planned economies is an ability to implement long-term capital investment, and what matters more now than the quantum of growth is its quality. This is where the outlook in most advanced economies is not encouraging, predicated more upon consumption than investment.
How is increased consumption supposed to materialise? Neither a pickup in employment (and consequently, income) nor a rundown in household savings is likely at this juncture.
Any consumption-led recovery will depend more on further monetary handouts than on earned income, and that means even bigger fiscal deficits. This implies further central bank underwriting of mountainous government debt.
What is needed instead is bold thinking on how to generate growth without relying on a monetary boost to consumption or on boosting asset prices to produce a wealth effect and generate confidence. Confidence is not going to be in strong supply given the fractured world economy.
It is obvious where efforts to stimulate growth should be directed in both advanced and emerging economies. As the Organisation for Economic Cooperation and Development said in its latest economic outlook report, “corporate investment and international trade remain weak”, holding back any pickup in manufacturing.
What policymakers desperately need to focus on is not the latest purchasing managers’ index as they search for signs of recovery, tech stocks
moving again or central banks easing policy further. They need to take the lead in creating new economic growth.
Climate change is accelerating, the Covid-19 pandemic has created a massive need for new health spending, and physical and digital infrastructure investment is lagging. All require spending of trillions of dollars over the coming decade plus Herculean feats of (government-led) organisation.
This is where sustainable growth can come from – not just monetary stimulus and consumption-driven demand. The challenge is massive and it requires an equally muscular response. Climate change is by no means least among the areas where attention needs urgently to be directed.
As the UN says, global greenhouse gas emissions have grown every year since the last global financial crisis, with no sign of reaching peak emissions in the next few years. “This is serious as the changing climate will impact all communities, especially those in Africa and Asia.”
It cannot be left to trendy solutions such as so-called ESG (environmental, social and governance) investments, which, as veteran financial analyst Jesper Koll in Tokyo has described, are chiefly “a means of generating commissions” for brokers and fund managers.
What is needed, the UN says, are new financing mechanisms such as innovation and technology funds, new types of bonds and crowdfunding, venture capital, angel financing and impact investment as well as more international development funding.
It is time for governments to set national targets for real growth, such as China’s pledge to become carbon neutral within 40 years, because, as with John F. Kennedy’s pledge in 1961 that America would reach the moon within a decade, such targets produce confidence and call forth investment.
Market economies have become passive in their approach to growth. They lack vision, such as that embodied in China’s Belt and Road Initiative. They have turned inward (as with Britain and Brexit). They cannot keep up with China so they turn to attacking it. But unlike the dead cat, it will not lie down and die.