Via Westpac’s Elliot Clarke:
Come 2017, with FOMC Chair Yellen and ECB President Draghi both speaking, market participants again paid close attention. In the event, monetary policy did not rate a mention this year, but the message delivered was still of great significance.
President Draghi’s address focused on the pursuit of global dynamism through productivity and multilateral cooperation.
Central to his thesis were two observations: (1) that the recovery since the GFC, including the recent pick-up in global trade, was a cyclical phenomenon; and (2) that looking forward, the ageing of the world’s population would act as a headwind for population and activity growth, particularly given the developed world’s existing debt burden.
The pursuit of productivity-driven growth is therefore key to the outlook for the global economy. While other drivers of productivity such as competition and research & development were flagged, openness was the ECB President’s focus.
According to President Draghi, “Open trade, investment and financial flows play a key role in the diffusion of new technologies across borders that drive forward efficiency”. Further, “International trade results in a more efficient use of production factors and in specialisation where comparative advantage exists”.
While globalisation is often touted for the way it aids developing nations, the above opportunities are now actually most important for ageing developed economies because as ”economies converge towards the global technological frontier, innovation becomes more important for sustained productivity growth”.
Though not said explicitly, clear from the above is a belief that robust growth in the global economy is only sustainable if productivity is pursued.
While focused on the opportunities, Draghi did not ignore the risks inherent in globalisation, particularly the fair and equitable distribution of its gains. Unsurprisingly, a distinctly ‘European’ solution was put forward: that of multilateral cooperation.
Simply, as has occurred in the European Union, regulatory convergence and cross-border cooperation was seen as the basis for fair trade, financing and taxation and consequently the distribution of gains broadly across nations and communities.
In his discussion of regulation, there was a particular focus on the financial sector. Sans regulation and cooperation, financial flows can often prove fickle and speculative, putting at risk productivity-boosting investment in the real economy. This is all the more true when policy makers are forced to run extraordinarily loose monetary policy for a protracted period, as has been the case post-GFC.
What does sound policy on this front look like? Cue FOMC Chair Yellen.
After a very extensive trip through the GFC experience, Chair Yellen emphasised that the concerted effort of regulators across the US banking system and financial markets had fostered a much more robust and resilient global economy.
Of greatest importance? The loss-absorbing capacity of US and global banks as well as supervisory oversight, both of which have been greatly increased. Market risk taking and asset/ liability maturity matching have also been brought into sharper focus.
This is not to say that the US or the world will never again face a financial or economic crisis like the GFC. [Indeed one could argue that the scale of global debt and/or much-reduced market liquidity, particularly under duress, could easily sow the seeds for a sharp shock in the future.] Rather the point Chair Yellen is trying to make is that increased regulation across the sector has made it more able to absorb and deal with any downturn.
It follows then that a reduction in regulation from the current status quo (as President Trump and the Republicans intend) could be to the detriment of the US and the global economy, potentially reducing banks’ health and therefore their capacity to lend and/or make markets “through good times and bad”.
The speeches of ECB President Draghi and FOMC Chair Yellen make clear that continued robust growth in the global economy and the opportunity it provides depend on the actions of the private sector and governments rather than monetary policy. Hence, prudent regulation and confidence are critical.
Having proved effective in fostering growth over the past decade, to Yellen and Draghi’s mind the current regime is not something to discard. Rather it is a strength to be supported and developed further, in pursuit of confidence, productivity and growth.