World economy is struggling to achieve “escape velocity” - Rabobank

Research Team at Rabobank, notes that the IMF’s first deputy director, Mr. David Lipton, suggested that 10 years after the onset of the global financial crisis, the world economy is struggling to achieve “escape velocity”.

Key Quotes

“Though global policy makers have attempted to stimulate their respective economies by way of ‘forceful’ macroeconomic policy action via fiscal stimulus and “appropriately accommodative monetary policy”, lasting recovery remains very much elusive. The ECB’s own efforts chime with this message, in spite of Mr Draghi’s insistence that the asset purchase programme is indeed working.

As Mr Lipton emphasised, what is really needed are greater structural reforms. Indeed, Mr Draghi, clearly in preparation mode ahead of the G20 meeting during last week’s ECB press conference, also added a much greater emphasis to this theme that he would normally do. Mr Lipton’s article referred specifically to a country close to Mr Draghi’s heart, suggesting that “where policy space is limited, for example in Italy, product market deregulation is particularly recommended for raising investment, employment, and output without generating budgetary costs in the short run.” In fairness to the ECB President, he correctly highlights the need for such structural reforms at just about every ECB meeting, adding that the ECB cannot and is not in the position to do all of the economic heavy lifting alone.

Mr Lipton’s blog also highlighted the need for advanced economies to focus on structural reforms in the shape of labour and product market reforms, with a new IMF staff paper outlining the specific reforms needed for advanced economies. Mr Draghi made specific reference to this need in Europe as a means of boosting economic growth and inflation.

If the market continues to look simply at the prospect or ‘need’ of additional QE and monetary policy stimulus, the real danger is that we truly are turning Japanese, with decades of weakness ahead. That German 10 year yields are seemingly unable to shift back above the 0.0% threshold at present merely serves to underscore these concerns. Mr Abe has a great deal to achieve should he wish to see his economy return to stability. Europe’s politicians would be well served to take note, sooner rather than later.”