Is economic uncertainty the latest norm?

Dr. Abdullah Shibli


What is happening in the world today? An apt manner to describe the current economic situation and future prospects is to paraphrase Charles Dickens who wrote, “It is the best of times, it is the worst of times.”  As I reflect on the economic problems we face at the beginning of 2016, I am reminded of that memorable paragraph that Dickens wrote to begin his book, A Tale of Two Cities. Are there any similarities between today and the times that Dickens was referring to, you may ask? And you might have correctly guessed my answer: sort of. The change in the landscape we witness is a reflection of contradictions everywhere: war in the Middle East and peace in South Asia; prosperity in South Asia but uncertainty and hard times in East Asia and South America; lower unemployment in the US, in sharp contrast to increased poverty outside the “prosperity belt”. The central theme that emerges from the forecasts and hard data is that we might be settling in for some uncertain times.

What are the lessons from last year, and what can we expect then for the next year? Even at the cost of sounding simplistic, a few themes strike out: we have to keep an eye on the world markets; the behaviour of economies that are in the midst of turmoil, including the European Union, oil-rich Middle East, Brazil, China, and Russia; and most importantly, learn to cope and live with volatility and uncertainty. It appears that three key variables are responsible in keeping central bankers and finance ministers on the edge:  the rate of inflation, uncertainty of oil prices, and the Chinese GDP growth rate. Inflation in recent times has been very low and almost predictable. However, even in its dormant state, the rate of inflation has been playing an inordinately huge role in two major global regions, the US and the European Union. It is almost like the rate of inflation is dictating monetary policy even when it is low, almost in a state of hibernation. European Central Bank’s President Mario Draghi has been railing against low rates of inflation in European countries, and recently gave a very powerful speech along the lines of Hamlet’s soliloquy “To be or not to be” in defense of ECB’s determination to fight the low inflation level. At the Marjolin lecture, organised by the Deutsche Bundesbank, Frankfurt, on February 4, 2016, Draghi said, “There are forces in the global economy today that are conspiring to hold inflation down.”

The US economy is also suffering from the same malaise as the EU countries, viz., deflation. The level of inflation has been low (i.e. below the targeted 2 percent), and with decreasing oil prices and a strong dollar, it appears that inflation is defying all attempts to stoke it up a little. But, why is the Fed so keen on a higher level of inflation? Because a lower inflation only reflects some structural weakness in the economy, and is thwarting the Fed’s well-publicised plan to raise the interest rate. The most interesting development in recent weeks has been the open disagreement between two Fed governors on the possible path inflation might take in the USA! On March 7, 2016, Vice Chairman Stan Fischer, a distinguished economist, said that inflation may be starting to move up from the current low levels. “We may well at present be seeing the first stirrings of an increase in the inflation rate—something we would like to happen.” Another fellow Governor of the Fed, Lael Brainard, expressed her doubts on the same day. She “expressed uncertainty about whether an improving job market would b enough to bolster inflation, given persistently low oil prices and a strong dollar”. Interestingly, these two members of the Federal Reserve Board use the same models, share a distinguished team of crack economists at the Fed, and probably read the same reports, but differ on the inflationary outcomes!

As for oil prices, there is not only increased variability but also greater uncertainty.  A US Department of Energy forecast on March 8, 2016, articulates this heightened level of uncertainty very succinctly: “Crude oil prices began to increase during the second half of February in response to potential future supply reductions and better economic data in the United States. Discussion of a potential plan to freeze production at January levels among leading Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil producers may have contributed to some covering of short positions ahead of a long weekend in US markets. Such a plan, if adopted, could help support prices but recent statements suggest that such collaboration is not imminent.”

And this is not just an extreme view. There is now a consensus that while prices are likely to remain low in the short term, crude oil prices will exhibit the same level of volatility we have seen in the last six months.

Let us now turn to the thousand pound gorilla in the room, which undoubtedly can be singled out as China and its GDP growth prospects. China has been buffeted over the past year and a half by strong headwinds as it races to become the world’s largest economic power. Major structural changes notwithstanding, China’s economy will continue to lurch forward at an average growth rate of 6 percent, and there are renewed fears of labour unrest, excess capacity, and flight of capital. Nobel Prize winning economist Michael Spence, in an opinion piece co-authored with Fred Hu, dourly predicts that “China’s current bout of economic volatility is likely to persist, though increased transparency could do much to blunt it.”

So finally, what does all this uncertainty mean for Bangladesh? While we can still count on our GDP getting a boost from domestic consumption fuelled by higher salaries, our external exchange purse may face some strains from dual uncertainties. Bangladesh’s foreign exchange earnings have two key components: exports of RMG and remittances from abroad, particularly from Saudi Arabia and the Gulf states. Both of these areas are subject to the vicissitudes of external shocks. During a recent press briefing, a spokesperson for the Global Research team  of Standard Chartered Bank said, “We are positive over the medium term. But all the global view will have a bearing on Bangladesh because it is quite exposed to the European Union and US in terms of exports.”  For Bangladesh, the challenge is to keep an eye on the multiple uncertainties lying ahead and manage them to our advantage.

The writer is an economist and author of a recent book, Economics is Fun. Short Essays for the Masses.

Source: The Daily Star


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