Can You Survive In The New Economy?

The global economy has entered a new phase where the old rules don’t apply and the new rules are still unclear. Economic growth, inflation, and financial markets are all behaving oddly and badly. But what is causing such disruption?

What is happening?

Economic growth in many countries around the world is less than expected and looks set to remain at historically low levels for the next few years.

An ageing population, on-going levels of debt in the private and public sectors and a sense of insecurity that makes businesses more likely to save than spend are causing concern.

Technology too is playing its role, as media headlines laud the latest breakthroughs even though they don’t lift the economy or increase productivity.

High debt levels are also causing companies to focus on reducing their financial exposure and prioritising debt reduction over investment and expansion.

Unprecedented initiatives such as historically low interest rates and quantitative easing demonstrate the extent to which governments are trying to jump-start activity.

Even with such unusual attempts to stimulate action there is little response as the economy refuses to react in the way it has done in the past.

Such interventions would have been criticised in previous years for being dangerous and foolhardy and leading to high inflation and high interest rates.

But today’s economic environment seems immune to such perils as the problems lie at the other end of the spectrum in the form of deflation and low or negative interest rates.

Why is it happening?

There are a number of reasons why traditional policy approaches to the economy aren’t working and may not work in the future.

First, even though governments and central banks are putting money into the market banks are using it to increase reserves rather than lend to customers.

The unintended consequence of what governments and central banks are doing is to support banks rather than the entrepreneurs and businesses that need help.

Second, given the excessive amount of capital investment made by businesses in previous years there is now too much capacity chasing too little demand.

As a result commodity prices and wage rates are low while unemployment and particularly youth unemployment is excessively high in many areas.

New technology is playing its role too by keeping commodity prices down, as it allows energy companies to find and extract raw materials at lower costs.

Third, the digital revolution is having an effect, as it generates enormous wealth for an elite few without creating the expected numbers of jobs.

Digital technology is causing a profound rewriting of the rules and   governments struggle to understand whether it represents a fundamental or a temporary change.

SO, in order to break the cycle of static or falling growth rates a new set of rules is needed to make sure the current malaise doesn’t become the norm.