Dispatches from the front: Cautious optimism in Jackson Hole
Lipsky noted that, "One year later, central bank and policy maker efforts to overcome the financial crisis have made progress, with many fundamental changes stemming from last year's challenges, although the exact nature and course of these changes remain far from certain." He went on to note the unprecedented policy maker action -- including massive monetary and fiscal stimulus. These moves, which emerged in response to the global financial crisis and the sharpest economic downturn since the end of World War II, averted the very real possibility of a global financial catastrophe."
In this, Lipsky has a strong point. Without question, central bank and policy maker intervention, including new, creative liquidity tools, averted the collapse of the global financial system. Even so, central bankers, like Congressmen, will get little credit for this, consistent with U.S. Rep. Barney Frank's (D-Mass.) adage that "Congress doesn't get any credit for averting a catastrophe." No matter: so long as modern civilization and human development has been safeguarded, that's all that counts.
Lipsky went on to note the positive forecast of many financial leaders: "The mood in Jackson Hole was more upbeat than it would have been even a few months ago," Lipsky wrote. "Policy makers and central bankers sense that their actions are bearing fruit, and that global growth prospects are reviving: Q2 data for the largest developed world and emerging market economies show either positive GDP growth or moderating rates of decline, he said. Financial markets also reflect sharply improved assessment of overall risks. "
This optimism is well-founded. Key economic fundamentals in the U.S. and Europe are trending higher: it remains to be seen whether consumer spending, business investment, and exports (particularly in the United States) will be sufficient to sustain the uptrend, but the initial rise is clear. More must be done to free-up credit for small/medium-sized businesses, however, who still aren't getting enough funds to expand their operations.
Lipsky also wrote that, at this juncture, the global economy appears to be on-track to attain the IMF's 2010 GDP growth forecast of about 2.5 percent GDP growth, which for the world is moderate GDP growth, following a contraction of about 1.5 percent in 2009. "Considering the risks faced a year ago, this is not a small achievement," Lipsky said.
If, in fact, Europe and the U.S. continue to pull out of their recessions, and China achieves at least 6-7 percent GDP growth, we'll hit the IMF's 2010 GDP forecast of 2.5 percent. The time it takes for the global economy to return to normal, healthy 4.0-5.0 percent GDP growth, however, remains an open question. The latter will require a substantial increase in emerging market consumer spending.
As Lipsky cautions, a moderate growth outcome is no guarantee, moving forward. A revival of private sector spending, including consumption and business investment, is essential for a sustained recovery. That will require the normal cyclical incentives of profitable prospects and attractive financing. "Inflation threats are distant," Lipsky wrote, "and there is little doubt that central bankers intend to keep interest rates low for some time to come."
Of these two hurdles, financing and profitable prospects, for large companies the bigger hurdle may be profitable prospects. The world in this early stage of the globalization era has an abundance of manufacturers and producers, but it hasn't yet identified where all the new consumers will come from for those increased goods.
Ultimately,Lipsky paints a picture of cautious, close-vested optimism among bankers and policy makers at Jackson Hole. There is a sense that a calamity has been averted, but this relief is wedded to an understanding that the world must now turn to the next, immediate hurdle: eliminating global imbalances and finding the millions of new consumers needed for adequate global growth.