2020s will test leaders’ conviction

Export-led growth models suffer amid weaker growth and rising unilateralism

 
The first instalment in this two-part series examined the global economy of the 2020s, painting a baseline picture of stagnant, if not worrisome and declining, global growth.

If recent past is prologue, it is questionable whether world leaders can find the vision and will to tackle key global challenges.

The US policy course in the 2020s will hinge in part on forthcoming presidential elections, in which a few thousand votes in Wisconsin, Michigan and Pennsylvania could be more decisive than millions across the country. There is little hope that common ground will be found.

The US’s enormous challenges – fiscal sustainability, entitlements, stagnant real incomes, climate change, infrastructure demand – must be addressed amid a path of slow, gradual consolidation. But tackling longer-term challenges does not seem probable, despite the burdens being placed upon future generations.

Fiscal policy may become broadly neutral or mildly expansionary. Many Republicans are tiring of their party’s recent profligacy. Democrats have their priorities, and meeting those is incompatible with gradual consolidation. Many believe the US can sustain higher debt loads given lower-for-longer interest rates, despite excessive deficits. Monetary policy may by default need to continue shouldering the burden of stabilisation policy.

Europe offers little ground for cheer. It should boost productivity and strengthen the euro area by better forging union-level institutions and tackling national imbalances.

The European Central Bank carries an inordinate burden for macroeconomic policy stabilisation. But with nationalism ascendant, it is unlikely to receive much fiscal support from countries where space exists, nor from reforms in over-indebted nations. Structural change proceeds languidly. Hesitant progress will be made in strengthening European institutions given divisive debates about the proper balance between risk sharing and reduction. Italy remains burdened by low growth and high debt and could be one shock away from crisis. On Britain’s exit from the European Union, divorce may prove far easier than settlement. Germany’s reliance on manufacturing may face overhaul, especially the automotive industry. France faces perpetual struggle in reforming the state’s heavy presence.

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