My Opinion | Jan 14,2023
Aug 19 , 2023
By Mohamed A. El-Erian
The global economic picture is filled with anomalies. Japan's GDP is growing faster than China's, and the US's retail sales in July were double what was forecasted, even with significant rate hikes by the Fed. Despite its many rate hikes, the UK sees high inflation and wage growth, while countries like Brazil and Chile are cutting interest rates, observed Mohamed A. El-Erian, president of Queens’ College at the University of Cambridge.
With so many moving pieces, and under such unconventional conditions, navigating today’s global economic landscape would be challenging for anyone. But even if we cannot anticipate every contingency, we can understand quite a lot by assessing the US Federal Reserve’s prospects for engineering a soft economic landing in the near term.
The global economy this year is full of puzzling surprises. Japan’s GDP growth is surpassing that of China, and July retail sales in the United States were double the consensus forecast, despite the US Federal Reserve pursuing one of the most concentrated rate-hiking cycles in decades.
In the United Kingdom, wage growth has risen to an annualized rate of 7.8pc and core inflation has remained high, even after 14 consecutive rate hikes by the Bank of England (with more to come). Meanwhile, Brazil and Chile have both cut interest rates, diverging from market expectations that the Fed will keep rates high for a prolonged period.
These oddities are just a few of many, and the uncertain implications of significant structural shifts on the horizon add to the complexity. These include the necessary transition to zero-carbon energy, the artificial-intelligence revolution, and various other innovation-driven changes. Add geopolitical tensions and the retreat from economic and financial globalisation, and a wide range of potential scenarios opens up.
With so many moving pieces and under such unconventional (and, in many cases, unprecedented) conditions, navigating this landscape would be challenging. That is when I find it particularly useful to return to a simple analytical framework that I learned early in my career as an economist. It is an extreme version of a “reduced-form equation” that economists use to focus on just a handful of key factors for predicting outcomes.
These factors may not fully explain a phenomenon, but this strategy is better than relying on an impractically large and unwieldy set of factors.
In today’s context, my analytical approach poses a simple question: What single piece of information would be most valuable if I were stranded on a desert island for six months and wanted to understand what had happened to the global economy during that time?
Given the current state of affairs, I would primarily want to know how the US had managed its growth-inflation dynamics. Or, more to the point, I would want to know whether the Fed had achieved a “soft landing” (bringing inflation back down toward its target without causing a sharp increase in unemployment).
This information is crucial, because the global economy currently lacks alternative engines. After all, the growth challenges facing China, the UK, and the eurozone are not susceptible to quick policy fixes; a still-levered international financial system with high debt levels can ill afford another surge in US interest rates and strong dollar appreciation; Japan has yet to figure out how to exit its “yield-curve control” policy smoothly; and the global economy continues to suffer gradual fragmentation.
At first glance, the prospects for the Fed achieving a soft landing do appear promising. Inflation has receded from its peak of over nine percent last year to slightly above three percent, bringing it much closer to the two percent target. At the same time, household spending continues to drive economic growth, and corporate balance sheets are solid.
These conditions suggest that the US economy can absorb the cumulative impact of the Fed hiking rates by five percentage points, while also sidestepping the effects of faltering Chinese growth and Europe’s on-and-off flirtation with recession. But, as the economic historian Niall Ferguson recently pointed out, “managing monetary policy is not in the least like flying a plane.”
This simile seems especially applicable to the current Fed, for several reasons.
The Fed’s operating manual is outdated. Its “new monetary framework” is, in fact, suited for the prior decade of insufficient aggregate demand, rather than to this decade of insufficient aggregate supply. The Fed’s landing zone is questionable, because the inflation target it is pursuing may well be too low given current structural and secular realities.
With its excessive focus on immediate conditions, the Fed could end up neglecting the future wind patterns it will encounter as its altitude changes. It initiated its landing sequence late, following a long period in which it had mischaracterized inflation as “transitory” before finally implementing an intense cycle of rate hikes.
And, finally, it is unclear whether the Fed has learned enough from its forecasting and communication mistakes to make the necessary course corrections. Yes, the US economy has defied skeptics by maintaining robust growth above that of other major economies, and despite its notably higher interest rates and significant external headwinds.
But the continuation of this exceptional performance hinges on the Fed’s ability to establish a low and stable inflation rate without triggering a recession. This is a delicate balancing act, and whatever happens will significantly influence the rest of the global economy and how policymakers navigate today’s extraordinary uncertainty. My hope is that six months from now, we will celebrate the Fed’s success in achieving a soft landing and in positioning the US and the global economy to manage the exciting, but challenging, secular and strategic transitions ahead.
My fear, however, is that the process will be much more complicated than many economic and market analysts expect, casting a once-avoidable shadow over one of the few bright spots in the global economy.
PUBLISHED ON Aug 19,2023 [ VOL 24 , NO 1216]
My Opinion | Jan 14,2023
Fortune News | Jan 09,2021
Viewpoints | Jul 31,2021
Viewpoints | Oct 28,2023
Commentaries | Sep 10,2023
Viewpoints | Mar 11,2023
Fortune News | Mar 05,2022
Fortune News | Aug 31,2020
Viewpoints | Jun 18,2022
Editorial | Feb 15,2020
Photo Gallery | 83145 Views | May 06,2019
Photo Gallery | 75305 Views | Apr 26,2019
Fineline | 58775 Views | Oct 03,2020
Fortune News | 58527 Views | Jul 18,2020
Commentaries | Dec 02,2023
Life Matters |
My Opinion | Dec 02,2023
Sunday with Eden | Dec 02,2023
Agenda | Dec 02,2023
Editorial | Dec 02,2023
Dec 24 , 2022
Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But...
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country's most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or two...
Dec 2 , 2023
The symphony of traffic noise in Addis Abeba is not just a sign of life, but a siren...
Nov 25 , 2023
Ethiopia's quest to develop a functioning capital market is a demanding yet not unach...
Nov 18 , 2023
Prime Minister Abiy Ahmed (PhD) has made a fervent call for landlocked Ethiopia to ga...
Nov 11 , 2023
In November last year, a ray of hope pierced the gloomy skies of Ethiopia as the Pret...
I have a love-hate relationship with my phone. It is my go to source for information. I enjoy interacting with text messages and browsing t...
Over the weekend, I attended a wedding where my husband was one of the protocols. Despite the typical joy...
Dec 2 , 2023 . By MUNIR SHEMSU
Mamo Mihretu, the governor of the National Bank of Ethiopia (NBE), has outlined a com...
Dec 2 , 2023 . By AKSAH ITALO
BGI Ethiopia, one of the largest brewing companies, is in the throes of a major trans...
Minister of Agriculture, Girma Amentie (PhD), is leading a charge to overhaul the fer...
Dec 2 , 2023 . By AKSAH ITALO
Amidst accession to a cross-regional trade, one of the oldest industries is strugglin...
Or see contact page