How reliable is Gulf growth in an uncertain world?
As a student of economics once upon a time, it was a shock to discover that its mainstream practitioners mostly believed that governments could systematically guide or even control key variables such as GDP growth, inflation and unemployment.
The idea that something as amorphous and mysterious as the aggregate efforts and behaviour of millions of individuals or companies could be modelled accurately enough, consistently over time, to enable management of a dynamically productive yet âequilibrium’ condition (suitably adjusted by the monetary and budgetary actions of the state) seemed intuitively pretty strange. Needless to say, though, politicians with lofty imaginations have always liked the concept.
The natural rhythms of the business cycle, and incidental variability of its components, were legitimate matters of enquiry, of course, with scope for amelioration, but the ability of governments to make things worse as much as better seemed an obvious historical fact, easily accountable for in terms of their own motivations.
That’s leaving aside the reality that a great deal of what passes for economic debate actually reflects political leaning, so that policy preferences and tenets inherently depend on the vision of society or sense of moral philosophy of the proponent. All told, it would be ridiculous to suggest there is anything like a definitive truth to what is cryptically named a social science.
Such musings are not merely abstract. Plainly today key Western authorities feel they can track an economy’s precise position, and then fine-tune it along a dial of presets. Treating it like a linear, one-dimensional proposition, there is a heavy emphasis on simply calibrating overall demand relative to an ideal level of supply of goods and services, as if they (and the jobs implied) will necessarily and predictably follow the lead given.
Hence, in the special circumstances since the global financial crisis, there are frequently references to recovering the trend line of growth that preceded the cataclysm, as if there was nothing wrong with how those heights had been attained, namely through the ramping up of debt. Notionally, then, an artificial boom doesn’t necessarily entail a counterpart bust, or some unwinding in âprices and quantities’. While the mechanics of wealth creation are thus taken for granted, governments assume they can set an asymmetric path for the economy: only ever upward.
It’s a discussion that can provoke heated argument. Its relevance today, and here, is that the whole world is substantially governed now by a fundamental policy of stoking stimulus, and this phase of the cycle looks dangerously familiar in respect of its âcredit intensity’.
In this regard, it was interesting recently to see related research by Kuwait-based investment firm GIC, identifying that “for the GCC, credit and economic growth seem highly correlated”, while the risk remains of “productivity anaemia”, starkly exemplifying the dichotomy between demand-sided and supply-sided approaches to growth.
Yet, there’s even more to it globally now. The underlying, command-style mindset has also infected the financial markets, to the point where benchmark stocks and bonds are, frankly, relying on government intervention to keep them elevated.
Quantitative easing on an extraordinary scale — as perpetuated in the US, Japan and potentially now Europe — has distorted not only the entire global economy through rock-bottom interest rates but also investment and its returns. Developed and developing countries alike, and emerging and frontier markets, have been overwhelmed by these stratagems. China too, critically these days, is immersed in financial confusion.
That’s all bad enough, one might say. Decades on since an initial grasp of these things, it’s a further shock belatedly to realize that the prerogative that governments enact is further tainted by their central banks being players themselves in the markets(!). Providing ever-increasing liquidity to support stocks and bonds is one thing; to be actively manoeuvring with their own asset allocations seems quite another.
A body called the Official Monetary and Financial Institutions Forum has disclosed that central banks currently are turning away from fixed-income towards equities in their own portfolios. Without labouring over the ramifications, what chance the proverbial little guy in this rigged market, except, as ever, to try to second-guess officialdom, act accordingly, and hope for the best!
In the Gulf, there is a hybrid case in the operations of sovereign wealth funds, which plainly are governmental, but are viewing the international markets with this same awareness and considerable dependency. A recent survey by Invesco revealed that their investments are tending towards the strategic (essentially longer-term) rather than the tactical (shorter-term), hoping to ride out volatility and secure the most reliable earning stream possible over an extended period of time.
That sounds entirely reasonable, while still effectively sitting on a ledge on the world’s latest house of cards, wondering whether financial bubbles are going to pop all over again. Whether we like it or not, everyone is pretty much wedged into this patrician-inspired yet woefully rickety architecture.
By Andrew Shouler