Don’t blindly accept the IMF’s “new mediocre” era of “low growth for a long time”. The synchronisation of rising economic growth in the US, China, Japan and India remains a plausible event, according to the bank’s research.
BNY’s “G4 scenario” assumes that Japan’s average annual GDP growth is 2% for the remainder of the decade, the US averages about 3%, China 7% and India 8%.
“This scenario is optimistic, without being utopian,” said Simon Cox, BNY’s investment strategist based in Hong Kong. “It’s contrarian, without being crazy.”
By most measures, the US is on a recovery trajectory; China has avoided economic shocks and has been managing well through a thoughtful combination of stimulus and reform; Japan’s leadership and central bank are clearly determined to spark economic growth after decades of stagnation; and India is likely to push through key structural reforms that are transformative.
“This is an unusual confluence of events. The region’s stars rarely fall into alignment in this way,” Cox said.
Realisation of the G4 scenario would add $10trn to the four economies’ combined GDP by 2020 and would contribute $8trn to the GDP of the rest of the world, the bank said.
Oil and commodity prices would soar, of course. BNY said oil would hover around $100 a barrel.
GDP in the G4 economies is not meeting potential, “leaving them substantial room to grow without generating unwelcome inflationary pressure,” Cox said.
For example, the gap between the US actual and potential GDP “adds up to a cumulative $5.3trn over the past seven years, a waste of resources that is equivalent to shutting down the entire economy for three-and-a-half months”.
What would it take for the four economic giants to align on the growth path?
They would all have to perform better than the IMF and other forecasters now expect.
“But in most cases, the G4 scenario is in keeping with what the IMF and others foresaw a few years ago. Forecasters have lowered their sights in the past few years in the belief that recent economic setbacks reflect a new trend.
“We cannot say with any certainty that the G4 will grow as fast as we have outlined. We are saying that they could. And we prefer to view these four economies with undiminished expectations.”
The other scenario
BNY’s scenario is in stark contrast to an equally strong but pessimistic view from HSBC chief economist Stephen King, who warned in a client note “The world economy is like an ocean liner without lifeboats. If another recession hits, it could be a truly titanic struggle for policymakers.”
King argues that interest rates are so low the US Federal Reserve lacks “traditional policy ammunition” to combat a recession.
“In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.
“Remarkably enough, it’s six years since the last recession, suggesting the next one may not be too far away, yet there is a total absence of traditional policy ammunition.”
Central Banks in Europe and Japan have also launched quantitative easing programmes, and the flipside of BNY’s scenario could indeed be a synchronisation of the major economies — falling into recession.