Canadian deputy fears ‘ugly’ outlook for global economy

The world's leading economies are failing to implement the structural reforms needed to restore global growth, John Murray, a Bank of Canada deputy governor, told the New York Association for Business Economics on November 27.

Murray noted fiscal consolidation is widely being pursued by countries that require it, but raised concerns market forces are pushing consolidation too quickly in the short run. Gradual is best, he said, as fiscal multiples are much larger than previously thought.

By comparison, Murray said progress on structural reform has been "uneven", and accused some countries' initiatives of lacking ambition. Specifically, he said deficit countries are under pressure from the markets and support programmes, and so are more motivated to take action than surplus countries.

The biggest let-down, Murray said, is the failed rebalancing of global demand. On the surface, current account balances have mostly fallen in important surplus countries and domestic demand has increased as a proportion of their GDP growth. However, he dismissed much of this "correction" as a symptom of lower demand in deficit countries. Rather than rocketing domestic demand, export sales are falling due to "aggressive belt-tightening" elsewhere.

The deputy governor said what increase there had been in surplus countries' domestic demand has often been concentrated in fixed investment, which was already "inordinately high and frequently misallocated" rather than in household consumption. This does not represent the required effort to shift demand patterns and support global growth, Murray argued.

Murray said the lack of progress is not entirely a product of failed or partial policy implementation, but conceded "there is a sense we could have done better".

He compared the policy progress across the globe to three possible scenarios mapped out by Bank of Canada economists in 2011: ‘the good, the bad and the ugly'.

The ‘good' assumes the timely implementation of the G-20 framework for strong, sustainable and balanced growth agreed in 2009. The ‘bad' has most of this framework fulfilled but with a three-year delay, while in the ‘ugly' scenario only "half the job is done".

If the bad scenario is realised, as Murray believes could be the case, world output will fall around 8% below the good scenario, or around $6 trillion. If matters turn ugly, the cost will be even greater.

"Taking all of this together, we appear to be trapped in the bad scenario. But if the situation continues, it could easily turn ugly," Murray said.