While the US’s current-account deficit was close to five percent of GDP in 2008,
China was maintaining a whopping current-account surplus of nine percent or higher
LONDON – Much will be said about the tenth anniversary of the 2008 financial crisis, so I will focus on the global economy, which has not been nearly as weak as many seem to think.
According to the International Monetary Fund, the rate of real (inflation-adjusted) world GDP growth averaged 3.7 percent in 2000-2010, and would have been close to four percent if not for the so-called Great Recession. By comparison, the average annual growth rate so far this decade has been 3.5 percent, which is slightly lower than the average rate in the 2000s, but above the 3.3 percent rate in the 1980s and 1990s.
By my reckoning, China has contributed an even larger share of global growth in this decade than it did in the last, with its GDP having almost tripled from $4.6 trillion at the end of 2008 to around $13 trillion today. That additional $8 trillion accounts for more than half of the increase in global GDP over the past decade.
I have long attributed the financial crisis to imbalances within and between the United States and China, the world’s two largest economies. While the US’s current-account deficit was close to five percent of GDP in 2008 (and closer to seven percent in some quarters of 2007), China was maintaining a whopping current-account surplus of nine percent or higher.
Following the crisis, I predicted that the US and China would have to swap places to some extent over the course of the next decade. China needed to save less and spend more; and the US needed to save more and spend less. Judging by their current accounts today, both countries appear to have made significant progress. In 2018, China’s surplus will have fallen to around 0.5-1 percent of GDP, which is remarkable considering that its GDP has more than doubled since 2008. Equally remarkable, the US will register a deficit of 2-2.5 percent of GDP, which is within the 2-3 percent range that many economists consider sustainable.
Other global indicators, however, are not as encouraging. Back in 2008, the eurozone ran a current-account deficit of 1.5 percent of GDP, with Germany recording a surplus of around 5.5 percent. But Germany’s large surplus owed much to large deficits in other eurozone countries, and that imbalance gave rise to the euro crisis after 2009. Worryingly, Germany’s surplus has since ballooned to around eight percent of GDP. As a result, the eurozone now has a surplus close to 3.5 percent, despite, and probably because of, years of weak domestic demand in the Mediterranean member states. This is surely a sign of further instability ahead. In fact, the slow-brewing crisis in Italy may be a harbinger of what awaits the bloc.
A central feature of the economy prior to the financial crisis was the US housing bubble, which itself resulted from the financial sector’s invention of increasingly intricate (and dubious) methods of recycling global savings. A decade on, it bears mentioning that many “global cities” like London, New York, Sydney, and Hong Kong now have home prices that only a very small minority of their permanent residents can afford, owing to the growing demand from wealthy investors abroad.
But as of this year, there are growing signs that housing prices in these and other cities may be undergoing a reversal. This may simply reflect actions taken by municipal governments to provide more affordable housing to their residents; but it also could indicate that marginally affluent new buyers are becoming scarcer.
To be sure, a gradual decline in house prices in these cities would be a welcome development in terms of economic and social equality. But one would search in vain for a time when declining home prices did not produce damaging side effects.
Having now assumed the chairmanship at Chatham House, I am eager to encourage more research into how factors such as housing costs relate to larger issues of income and wealth inequality. To my mind, the world needs much better metrics for tracing these interconnections.
For example, it is clear that wealth inequality has increased much more than income inequality over the past decade, with the rapid rise in urban housing prices playing a central role. In many developed countries, including the United Kingdom, economic inequality is a serious problem. Yet in terms of income, the latest data show that inequality has actually fallen back to the (still-too-high) levels of the 1980s.
If common perceptions about inequality tend to inflate what is actually happening, that is because many companies’ top executives are earning increasingly massive sums relative to the workers under them. Such compensation packages can be rationalized in the context of share-price performance, but that hardly makes them justifiable.
This is another issue that I hope we will be studying at Chatham House. The strange equity-market rally that has been proceeding almost uninterrupted since 2009 has been fueled in large part by major corporations’ stock buybacks. In some important cases, companies have even issued debt to finance the repurchase of their shares.
Does the growing prevalence of buybacks explain why fixed investment and productivity have remained so weak across the West? And might those macroeconomic factors explain some of the political upheavals in Western democracies such as the UK and the US in recent years?
On both counts, I suspect that the answer is yes. Unless we can recover a world in which business profits actually serve a purpose, the likelihood of more economic, political, and social shocks will remain intolerably high.