by Cees Bruggemans
The world, and our own SA consumers & businesses, for long had a self-reinforcing growth psychology, companies looking for investment opportunities, creating income flows, consumers spending, both using credit, this further reinforcing, with mild to modest inflation expectations ensuring real wage demands & settlements, further reinforcing the demand engines.
Until things got short-circuited and this wasn’t any longer the dominant model, the world going ex-growth, first in the rich regions, and then also in large swaths of Emerging Markets (EM) as China started to adjust structurally, searching for a slower but more sustainable growth momentum model, but with downside fallout for commodity producers.
Exceptionally dismal times have called forth exceptional unconventional central bank actions, taking interest rates to zero and creating unprecedented liquidity flows through bond buying and bank lending support. But has it been enough?
In the case of Japan, how do you break 25 years of embedded deflationary behaviour? Expecting prices to fall, not demanding or expecting to grant real or even nominal wage increases, holding off on purchases as the deflationary impulse rewards patience and penalises proactivity.
Europe seems to have been descending into a Japanese-kind of condition, though still only in its early stages. Crises hobbled its lamed banks, short-circuited its lending channels. Fiscal austerity aimed to right-size government finances, but also starved general income and spending. Once the psychology of stagnation (fear, caution) became embedded, businesses became less inclined to invest, or hire more labour, or grant real wage increases. And consumers became also more cautious, more frugal, more reticent, less expecting.
These same processes occurred in the US, but there an early and massive fiscal injection was followed up by three serial unconventional monetary boosts lasting years as fiscal largesse was unwound, banks were cleaned up, property excesses were absorbed.
The American monetary action had two objectives.
Firstly, to lower long-term interest rates, improving corporate & consumer cash flows of the over-indebted, over-leveraged, easing the financial fear factor.
Secondly, to boost asset market values, force positive portfolio effects (having to reinvest cash following bond purchases by central bank) and rising asset values creating a positive psychology loop and wealth effects, injecting purchasing power into the economy.
It worked in the US, for various reasons. Inflation expectations never really ended completely, long bond yields were still high when it begun and had still far too fall, the Fed was early and overpowering, both the reality of massive liquidity injections and the psychology boosting succeeding in getting demand to resume growing, quite quickly supported by cleaned out banks resuming credit lending.
The pace may have been slow, the recuperation modest, but it has proven real and sustainable, as cumulatively the property overhang was reabsorbed, the labour slack has been reabsorbed (yet to be completed but far advanced), the fiscal budget excesses were corrected and are now no longer a drag, and private investment started to respond positively, completing the positive reinforcement loop. In America, the growth psychology has been back in action for some years now, even if it has been slow going to work off the crisis excesses.
In Japan, this is yet to happen to any extent. They took two decades, with fiscal policy played out, to marshall monetary policy, finally starting an open-ended liquidity support action only two years ago.
The problem there has been that long-term interest rates were already near zero. Deflation behaviour was well embedded among businesses & consumers.
Breaking these has proven difficult.
Asset price boosts, wealth effects, have been one channel, but the more important one has been currency depreciation (40%) feeding through into easier business conditions. With government “guidance”, the corporate elite is being invited to change its deflation psychology (grant higher nominal wage increases).
The cherry on top has been the energy price fall, improving real purchasing power, but for this to be spent it will be necessary to overcome the deflation psychology – the challenge of 2015.
Europe has as yet not been completely drawn in by deflation psychology even if its early presence has been detected. The ECB has been politically & intellectually delayed, overcoming misgivings and taking an inordinate time (as had been the case in Japan for much longer) to become unconventionally aggressive in capital markets.
But this year in quick succession three positives kicked in, namely the ECB finally embarking on open-ended bond buying (boosting asset markets), if only from next month, the Euro so far in anticipation falling by 15%-20%, and the positive energy shock connecting.
One huge negative in Europe, missing in Japan or America, has been existential fears domestically alongside geopolitical shock and caution, as much migration and social problems, terror activity and threats, and the New Age Russian menace reviving old fears.
This is a rich cocktail that outsiders may have difficulty evaluating, and needs to be seen alongside old inflation fears (Germany), existential threats (much of Europa feeling insecure), painful supply-side reforms (peripheral Europe), and fiscal austerity and bank cleanups short-circuiting the credit process for long.
All these elements combined to shackle the European growth psychology, slowly turning it into a deflation psychology a la Japan. Turning all these flanks came late, though not as late as in Japan. Even if America was faster in adjusting on all these fronts, Europe seems to be turning a corner now, but without the benefit of new fiscal stimulus (even if austerity is no longer the drag anchor in Germanic lands). This latter aspect is the great criticism of many – it puts too much reliance on monetary action & fortuitous luck (energy price declines, real income boosts) in a situation where interest rates are already low and American-type benefits more difficult to achieve, also as European business has less reliance on capital markets.
Even so, though Europe is late, and the effects perhaps tepid, flanks are being turned, more easily than in Japan. Growth is resuming, notably if slowly in Germany, even as the peripherals (including France) keep suffering from structural shortcomings & inadequate reforms.
Thus, America is the eager if slow adjuster, Europe the late if tepid adjuster, and Japan the very late & resisting adjuster. But adjustment there is all round.
Both the liquidity actions & growth adjustments of rich regions are helpful in stabilizing global commodity and EM prospects still under siege from China’s attempts to escape its Middle Income Trap through structural repositioning, accepting the implied slower (if more sustainable) growth.
Thus the global psychology is being turned in stages following the Great financial & existential crises in the rich Western world, and Japan’s dormant condition of a previous era (the 1980s).
It has been slow going, first stabilizing financial market conditions and then getting growth going, both very tentative & slow, and then only serially in the rich world with enormous delays (of years) between the lead actors, even as China turned out taking even longer to address its structural shortcomings, being a belated and long-lasting weight on many commodity producers & EMs.
And the slower the overall turn, the more difficult the psychological turnaround (an old problem that the Poles rediscovered 30 years ago when attempting cold turkey reform when abandoning communism for market capitalism).
Having all this held up as example, South Africans should have little problem in recognizing some of their own psychological challenges.
Our external earnings growth has also been laid low by global events, but to this we have added a lot of self-inflicted political problems translated into supply disruptions and undermining private business and household confidence.
This has been going on long enough for it also to have eroded our more natural growth psychology (business risk taking, debt leveraging) into something far more cautious. New credit discipline, greater regulatory oversight of corporate actions regarding low income households, imposes shackles not there before. But it goes much deeper, the unease about jobs, income, lifestyle among some classes of consumers.
Among businesses there is the added release valve of sensing better growth opportunities remaining elsewhere (select parts of Africa, Asia, Aussie, Europe) and them shifting their primary focus there, reinforcing a domestic stagnation loop made worse by a growth unfriendly policy framework.
Our growth psychology is still in the process of being undone, never mind of being successfully addressed in an attempt to turn the ship around. Proof can be found in SARB leading indicators, the RMB/BER business confidence index and the FNB/BER consumer confidence index.
The WW1 marching song went thus:
“We are a long way from Tipperary, a long way from home” as the British Expeditionary force marched through the Flanders countryside on its way to its impending doom.
Get the picture, do we? Pity the government doesn’t.
