Mark Cliffe

The new normal isn’t normal

Acceptance of low growth is complacent and risky, according to Mark Cliffe, chief economist at ING. Beneath the surface there is profound instability that must be addressed if consumers and companies are to regain confidence.


The tepid economic environment has been described as ‘the new normal’ by economists and investment firms so often since the financial crisis that it has become a cliché. Yet while the existence of low growth, inflation and investment returns is undisputed, the notion that these characteristics are ‘normal’ is rejected by Mark Cliffe, chief economist at ING and author of The New Abnormal report, an update to which will be published shortly.

“Some say that while growth levels are unexciting, the ‘new normal’ is stable and so it’s something the world can live with,” notes Cliffe. “In reality, the current environment conceals a profound underlying instability that is anything but normal. Economics, politics and technology are being turned upside down in ways that threaten companies and are leading policymakers to take ever more extreme and unprecedented actions, the results of which are unpredictable”

“Some say that while growth levels are unexciting, the ‘new normal’ is stable and so it’s something the world can live with”

The unconventional policy measures in Cliffe’s crosshairs include quantitative easing (where central banks buy up financial assets) and negative interest rates. These ideas scarcely merited debate a decade ago. “Now we are seeing policymakers seriously discussing the potential benefits of introducing helicopter money, where currency is issued to citizens to encourage them to spend and kick-start growth. An environment in which such fanciful ideas are potential policies is neither normal nor stable,” he says.

The way in which policymakers are desperately searching for policy remedies, throwing off decades of monetarist conventional wisdom, reflects the severity of the challenge, according to Cliffe. “Central banks are making it up as they go along because the economic relationships that drive modelling, forecasting and policymaking have broken down,” he says. “Models are based on historical relationships. But, to take one example, we have no way of assessing the impact of China’s economic rebalancing and potential downturn on global growth because there is no precedent.”

Similarly, conventional forecasting models cannot explain why US wage growth is subdued despite low unemployment. “If economists are grasping in the dark in trying to explain phenomena such as these, then they have no way of understanding the broader challenges facing the economy,” says Cliffe. “Models are based on the idea that cycles always naturally revert to trend. If that no longer occurs, then we face great uncertainty.”

“If economists are grasping in the dark in trying to explain phenomena such as these, then they have no way of understanding the broader challenges facing the economy”

Some of the forecasting challenges facing policymakers are the unintended consequences of efforts to improve the stability of the financial system in the wake of the 2008 crisis. The radical restructuring the financial sector, which has increased the capital required by banks by three times compared to a decade ago, for example, means that credit is now distributed differently. Similarly, there is no way of knowing whether the new regulatory regime, which is still to be completed, will be as robust as hoped: innovations such as contingent convertible bonds, which are supposed to bolster a bank’s finances in times of stress, have already been the subject of market scares.

At the same time, technological change is undermining some of the foundations of the industrial economy. Historically, economic models have assumed that as production capacity is reached, costs start to rise and there are diminishing returns to scale. New digital technology typically leads to unit costs falling as output rises, overturning this assumption (and rendering existing economic models redundant). Moreover, it changes the competitive dynamic for companies: many digital markets often have ‘winner-takes-all’ tendencies, with little scope for strong second or third players.

Technology, as well as disrupting existing economic models, has the potential to create significant social upheaval: greater automation could result in large-scale unemployment, for example. “Yet it could also provide the spur that the global economy needs, if only companies would make the necessary investments rather than sitting on cash,” explains Cliffe. “But that will only happen when the uncertainties currently affecting the global economy diminish – and there is no sign of that happening in the short term.”

Cliffe says that the acceptance of low growth as an acceptable ‘new normal’ not only conceals the underlying instability affecting the global economy but also fails to acknowledge the higher risks of recession such an outlook would bring. “Lower growth means more frequent and deeper recessions,” he notes. “Recessions tend to lead to structural damage – factories close and people lose their jobs, for example – that cannot be easily undone. There is a risk of a self-perpetuating cycle of sustained damage to the economy and ever-lower growth.”

To date, either by accident or design, the world has avoided a recession in the post-crisis period. “However, the unprecedented policy measures employed have consistently failed to achieve their objectives: forecasts keep being missed,” says Cliffe. “While markets are cautious about withdrawing these policy measures – the limited moves towards ‘normalisation’ undertaken by the US led to a big upset in markets – their effectiveness appears to be weakening. It is clear that we are approaching the end of the road for existing measures, which is why radical ideas such as helicopter money are emerging.”

The continued weakness of the global economy will ultimately ignite a debate about the differences between monetary and fiscal policy. “For years, conventional wisdom has dictated that monetary and fiscal policy are different: the former is apolitical and the later political,” says Cliffe. “Ultimately, circumstances may force that view to change. The public anger at growing inequality, which some believe to have been exacerbated by quantitative easing which has inflated the prices of financial assets, suggests all economic policy is inherently political.”

This anger is fuelling growing political populism in the US and across Europe. This could lead to further structural changes to the global economy as cornerstones, such as globalisation and free trade, come under fire. “One possible alternative is that the crisis facing the world instead gives rise to a new set of ideas that revolutionises how we run economies in the future,” says Cliffe. “There’s no consensus on what these policies might look like, but there is growing interest in the idea of governments borrowing at current record low interest rates to fund much-needed investment in infrastructure for example. It’s vital that we create a policy framework that includes measures to strengthen business confidence and encourage companies to invest in new technology and stimulate growth.”

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