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HSBC's King Puts Western Economies Under the Dome

U.S. and Europe need to adjust to today's circumstances rather than hope for a return to precrisis economic growth rates, says HSBC chief economist Stephen King.

The International Monetary Fund lowered its growth forecast for the global economy this week, saying recent weakness in emerging markets was adding to the continuing sluggishness of developed economies. The downward revision was the third such move by the IMF in the past six months, and it begged the question of when economies would return to precrisis growth levels.

For Stephen King, the real question is whether, not when, growth will revive, at least in the developed world.

King, chief economist at HSBC Holdings, believes attempts to restore precrisis growth levels — whether via Keynesian stimulus or austerity policies — are fundamentally misguided. The high growth rates enjoyed by more Western countries in the post–World War II era were fueled by the growth of global trade, the entry of women into the labor force, rising education levels and an explosion of consumer credit, he contends. Those factors are largely played out today, and no new ones are ready to take their place, he argues.

"It is very difficult to get back to the growth rates of old," says King.

The 50-year-old Oxford-educated economist was in New York to promote his new book, When the Money Runs Out: The End of Western Affluence. It describes the core dilemma in personal terms. In King's first ten years of life, real per capita incomes in his native U.K. rose by 37 percent. Income growth slowed to just 13 percent in his second decade, a time of oil crises and recession, then picked up to 29 percent in his third decade and 36 percent in his fourth. By contrast, the last decade has been dismal: per capital incomes rose just 4 percent in the U.K.

King's breezy prose doesn't sugarcoat his stark conclusions: Western societies have made far greater claims on the future — in terms of promised retirement and health benefits and stock and bond market values — than their reduced growth prospects can hope to validate. The only way to square the circle is by somehow acclerating growth or writing down the value of those claims, he says.

King is dubious that quantitative easing can get growth up to escape velocity. QE did succeed in averting a depression back in 2008–'09, he acknowledges, but the Fed's continued reliance on bond buying has turned the strategy from a useful antibiotic into an addictive painkiller. Central bank liquidity exacerbates inequality by boosting asset prices and runs the risk of fomenting new bubbles even as incomes for most households stagnate or decline, he argues.

Without economic growth, political and social tensions can rise to the breaking point, King warns. If a rising tide isn't lifting all boats, anyone's gains can be seen as someone else's losses. Trust erodes; political extremism beckons. Hints of such tensions are already evident in the euro area today, he says, but could spread more widely in the West.

It's a dystopian vision that echoes the desperation portrayed by another Stephen King in "Under the Dome." The suspense novelist's story, now a popular U.S. television mini-series, chronicles a struggle for survival in a mythical New England town cut off from the outside world by a mysterious force field.

King, the economist, doesn't dabble in the supernatural, but his portrait of a society stripped of the promise of steady growth is as macabre as anything by King the novelist.

As he writes in the book, "Put simply, our societies are not geared for a world of very low growth."

King offers no easy solutions for avoiding such a dire future. The euro zone needs to move to some kind of fiscal union to survive; the U.S., U.K. and Japan need serious medium-term plans to get their debts under control; the international system needs a mechanism for reducing payments imbalances that requires action by surplus countries as well as deficit ones; and Western economies need to find ways to balance the interests of well-off Baby Boomers with younger generations facing a much more precarious future. Many analysts have made similar recommendations before. Getting policymakers to deliver is another matter.

The IMF's economists trotted out familiar advice with their July 9 forecast, which cut the projected rate of global growth this year to 3.1 percent from 3.3 percent previously. The U.S. should focus on deficit reduction over the medium term; the euro area should move faster to create a banking union to shore up its financial system; emerging markets should tackle structural barriers to growth such as poor infrastructure; China should consume more, Germany invest more.

The relationship between the developed and developing world holds the key, fund economists say. Stronger growth in emerging markets can help developed economies deal with their deep-rooted problems.

As IMF chief economist Olivier Blanchard put it, not for the first time and undoubtedly not for the last, "Substantial rebalancing is what is needed for the global economy to go back to health."

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