It is not an overstatement to describe economic growth in much of the developed world—especially in the US and Europe—as lacklustre. Since the Global Financial Crisis of 2007–8, growth rates have consistently remained below trend. Notably, this dilemma has persisted for the last 7 years, so it’s about time we better understand why growth hasn’t returned to its pre-crisis trajectory.
The global reputation of many behemoth multinationals has been tarnished by their dubious international tax arrangements. Among the worst offenders are Apple, Google and Starbucks. From 2009 to 2011 Apple alone managed to avoid taxes on $44 billion of its global profits. An Australian Financial Review investigation reveals since 2002 Apple has only paid $193 million in Australian tax, whilst recording $27 billion of sales over that period. It begs the question: how can such a well-known multinational, like Apple, engage in blatant tax avoidance within Australia’s sophisticated tax system?
It is now 5 years into the US recovery after the severe recession of 2008-9, unemployment has fallen to 6.7% and quarterly GDP growth remains between 1-2%. At first glance the recovery finally appears to be picking up momentum, with stronger then expected growth in the last half of 2013.
Looking at the longer term trends however, any optimism is quickly expunged as it appears the US is performing far below its potential. The IMF outlook for 2013 shows actual GDP to be more than 4% below potential GDP.
With Janet Yellen firmly in the reigns of the world’s largest central bank, many are looking to the legacy left by her predecessor Ben Bernanke. Love or loathe him, Bernanke undoubtedly pioneered a new style of central banking based on large scale direct market intervention, mainly through policies such as quantitative easing. With the policy now being scaled down, it is useful to ask whether QE and more broadly whether the Federal Reserve has been successful in supporting the US recovery.
With slowing growth in the BRICS and the underwhelming recovery in the U.S., many nations around the world are looking to free trade. Australia, among others, has been negotiating agreements with Asia, forming the Trans-Pacific Partnership.
Hysteresis in the periphery
Recently, financial markets around the world have undergone a sharp correction in response to fears of an eventual tapering in the Federal Reserve’s Quantitative Easing program. The reaction was spurred by Ben Bernake’s, Chairman of the Federal Reserve, comments to the press that QE will be slowed if unemployment falls to 7% and inflation remains within their target. Cautiously this may be sooner than expected as the US economy is beginning to show sustained periods of healthy increases in employment growth.
However, the same cannot be said for the European Union. GDP in countries in the periphery continues to decline, with Italy suffering a 2.4% decline and Greece a 5.6% decline in the first quarter of 2013. Alarmingly it’s Italy’s worst recession in 20 years. With this persistently poor performance, comes the danger of hysteresis.
With the September Federal election looming, both Labor and the Coalition are expected to use every political weapon in their arsenal, aimed at capturing every possible vote. Undoubtedly some of the most lethal are fiscal policies offering the highest possible marginal political benefit. Already, treasurer Wayne Swan’s decision to rescind the long held promise of a budget surplus has captured headlines in almost every major print newspaper in Australia. In contrast, the Coalition remains loyal to a surplus even though the budget’s automatic stabilisers are dragging it into a deficit. Juxtaposing these two budgetary stances, it is important to ask: which of the two is the better policy?
It’s been over 5 years since the heights of the financial crises, and yet the global economy still appears to be in a persisting slump. Albeit of the nascent pick up in economic activity amongst the largest economies, mainly China, US and Europe, unemployment in most parts of the developed world remains high, coupled with meagre growth rates. Observing the policy response to the slow recovery only offers reasons to lament.
Over the past month Ben Bernanke, the Chairman of the Federal Reserve, has pitted his fellow central bankers against each other in what is being labelled a ‘currency war’.
His decision to extend QE3 by printing money rather than issuing short-term treasures has further debased the US dollar against most currencies. In doing so Bernanke has revealed his tenacity in devaluing the currency to stimulate exports in pursuit of his mandate of full employment. Unfortunately, what seems to be in the national interest may not necessarily be so for the global economy.