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After several years of financial and economic turmoil, the world’s policymakers became accustomed to Olivier Blanchard warning of dark shadows looming over the global economy.
He took over as chief economist of the International Monetary Fund in 2008, just as the financial crisis hit. In January 2009, he declared: “We now expect the global economy to come to a virtual halt.”
Since leaving the fund in 2015 and joining the Peterson Institute for International Economics in Washington, Mr Blanchard, together with his colleagues, has been doing his best to point to rays of sunshine on the economy.
That means there is something oddly comforting about discussing the state of the world with the French economist and his new boss, Adam Posen, the think-tank’s president, who helped guide post-crisis policy while serving on the Bank of England’s Monetary Policy Committee.
In an interview with the Financial Times ahead of the G7 summit in Japan, the pair lay out a vision of a world where, in spite of poor growth and stagnant productivity, advanced economies are on the mend and emerging economies such as China are relatively well-placed to rise to their own challenges.
“I have a sense that the recovery is slow but it is not in great danger, at least no more than usual,” Mr Blanchard says. “We can talk about risks, they are always there. But the notion that around the corner there is a catastrophe waiting — that really strikes me as totally off.
“For the last seven years we have been thinking about the legacies of the crisis and all the things that have pulled the economy back. I think they are becoming less important,” Mr Blanchard argues, adding: “And so the question is why is it, that with no fiscal consolidation and banks in decent shape, at least in terms of lending, and zero interest rates, we don’t have an enormous demand boom? That is now the puzzle.”
The answer, he suspects, lies in a concern about the future that has led consumers to curb their spending and companies to decrease investment. “I think it is now much more weakness due to the expected future rather than the past,” he says.
That, says Mr Posen, ought to be depressing. But the reality is that the world has also for the first time in a long while found “a sustainable rate of growth”.
“What Olivier is describing is depressing and something we’d like to fix,” he says. “But ultimately this means that we’re not racking up huge amounts of either public sector or private sector debt to sustain this growth.” Although there are exceptions, with China issuing debt, for example, Mr Posen says “overall, the rich world, the advanced economies are growing at rates that should be sustainable. And arguably even China is.”
Mr Blanchard thinks the biggest risk for the US economy may be that markets are misreading the data and being too gloomy instead of recognising that the recovery is “one of the most balanced . . . we have had in a long time”.
He believes the US Federal Reserve will act again to raise rates sooner rather than later, which will take markets by surprise.
He frets about populist politics in his native Europe and the anger aimed at everything from austerity and UK membership of the EU, to the migrant crisis. And yet he still sees a European economy that is recovering.
Japan, he says, inevitably faces a fiscal reckoning when investors begin demanding that returns and interest rates pop back above zero, although he concedes anybody who has traded on fears of such an eventuality “has lost their shirt” in the past decade. When it comes to China’s transition from an export-led economy to one driven more by domestic consumption, both Mr Posen and Mr Blanchard argue the probability of success is high.
“Ultimately one of the more interesting things . . . is [the Chinese] have still got 40 per cent of the population to urbanise and it’s not all a bunch of illiterates or aged cripples,” Mr Posen says. “It is people who can be integrated [into a modern economy].”
Both, finally, share a scepticism over the turn to negative rates as the latest central bank monetary policy tool.
“Everything works a little bit. What worries me is that you get perverse effects on the banking system,” Mr Blanchard says. “At some stage you are screwing up banks so badly that bank credit is affected.”
The politics of negative rates are what worries Mr Posen, who points to suspicions about central bank motives in pursuing such policies.
Yet in the end, he argues: “You could avoid some of this mess . . . by just switching to expansionary fiscal policy.”
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