Fears on global downturn are overdone, say economists

Investors and financial markets have been too quick to believe the worst about the health of the global economy, raising the danger of a self-fulfilling and unwarranted downturn, leading economists said on Tuesday.

In a call for a “reality check”, Olivier Blanchard, former chief economist of the International Monetary Fund, and his colleagues at the Peterson Institute of International Economics say that global economic pessimism in 2016 has been in contravention of basic economic facts.

They warn that financial markets are unlikely to be good predictors of a coming downturn and that falls in prices are better regarded as a stabilising force, rather than a harbinger of doom. Mr Blanchard and his colleagues argue that such price slides are a sign of a return to normality, since valuations were previously inflated by central banks’ attempts to stimulate the economy.

“The probability of another 2008 [financial crisis] is inconceivable,” Mr Blanchard said. ”The banks are clearly much stronger than they were.”

Their report adds that the US economy is still recovering, low oil prices are good for growth, the Chinese economy is not collapsing and even the deep recession in Brazil can be overstated.

Adam Posen, head of the PIIE and a former Bank of England official, said financial market participants regularly held views that were at odds with economic reality — but that an excessively downbeat view could sap confidence and investment from the real economy.

While there were challenges across the world, notably from slow productivity growth, “most of the major economies, starting with China and the US, are growing more sustainably now than a decade ago, at their slower rates”, he said. “All the more reason then not to allow ourselves to be distracted by a financial market tail wagging the macroeconomic dog.”

The report notes that despite low oil prices hitting investment in energy projects in the US, jobs growth in the country is strong, as are real income growth and household spending.

Though Chinese growth was slowing, consumption was also rising strongly and the overhang of unsold property was getting smaller, raising hopes that the Chinese authorities could use the time to restructure over-indebted state-owned enterprises often in the heavy industrial sector.

Mr Blanchard said that an earlier prediction of his that low oil prices would be “a shot in the arm” for the global economy had so far not proved correct. This was because the rise in consumption triggered by the oil price fall had been outstripped by a fall in energy-related investment.

But he added that the positive effects of lower oil prices on consumers were probably merely delayed.

“There is no reason to think low oil prices are bad for the US and good reasons to think that markets are too short-sighted, focusing on the short-run effects rather than on the medium-run implications,” he said, although he conceded that if households expected inflation to stay permanently low, weakness in spending could persist.

The report was conceived three weeks ago and has coincided with greater stability in global equity markets since mid February, but the prices on the FTSE all world index are still almost 10 per cent lower than a year ago and 3 per cent down on the start of 2016.