Easy monetary policy, a halving of the price of oil and sliding currencies in many parts of the world should be a recipe for faster economic expansion.
Yet when the International Monetary Fund released forecasts on Tuesday it left its prediction for global growth this year unchanged at 3.5 percent. That’s less than the 3.9 percent it estimated a year ago before oil plunged, the dollar rose and the European Central Bank began quantitative easing.
“If you had told someone 15 years ago this is the level of interest rates and this is the oil price, they’d have thought there would be a boom,” said Michala Marcussen, global head of economics at Societe Generale SA in London. “But there isn’t.”
Marcussen suspects reliable drivers of demand in the past are no longer as powerful as they once were. All told, she reckons that the fillip from lower interest rates, energy bills and currencies may be just half what economists would have expected previously.
So why are onetime engines not powering expansion more? The answer lies in a mixture of structural shifts and legacies from the 2008-2009 financial crisis.
Lower borrowing costs are probably being stymied by the need to reduce debts, a continued reluctance by banks to lend and tighter financial regulations.
As for oil, increased energy efficiency is negating some of the benefit of lower costs. Weaker exchange rates, as evidenced by Japan, may also provide less of a positive pulse as exporters pocket profits rather than engage in price wars.
More fundamental reasons are also in play. Aging populations mean future retirees are saving more, Marcussen said. And China is still transmitting deflation.
The failure of economists and their models to recognize the world has changed explains why forecasts are so regularly wrong, according to Stephen King, chief global economist at HSBC Holdings Plc.
He reckons that since 2000, analysts overestimated annual growth in the U.S. a dozen times and underestimated it on just three occasions. The divide is not as wide but a similar pattern is evident for Japan, Germany and the U.K.
“Why it is that people make these assumptions year after year and don’t observe things are persistently weaker?” said King.
Expect to hear much debate over so-called secular stagnation when policy makers gather at the IMF this week, leaving governments under pressure to do more to boost demand.
“On the margin, the global economy is still showing more signs of stagnation than either a boom or a bust,” said Ed Yardeni, president of Yardeni Research Inc.