The steady and robust pace of the global economy is masking unprecedented challenges: while a stronger and more sustainable equilibrium is easily discernible and a cooperative solution is more imperative than before, global economic policy negotiations have become more complex and perhaps intractable, according to Pierre Cailleteau, Chief International Economist at Moody’s Investors Service.
As a result, what rating agencies call “transition risk”, namely the risk of transiting abruptly from one state to another (a less favourable one in the current circumstances) has increased.
“The recent IMF / World Bank / G7 meetings have taken place at a time when global economic growth is cruising at 5% and, for the first time in modern history, an emerging country —
Such recent annual gatherings have been marked by two main developments. Firstly, emerging market constituents are becoming increasingly assertive, and the ‘grand bargain’ that will be needed to reduce the risk of a disruptive global macro scenario will require more concessions from the established powers (the
Secondly, the concept of “uncertainty”, i.e. immeasurable risk, is becoming increasingly prevalent.
“To an extent, these developments reflect the newness of globalisation. The recent shift in emerging states’ influence over the world economy — and their concerns that their economic weight is not reflected in their voting power — should not be exaggerated but does appear to be momentous,” Cailleteau added. “Not only are the new powers intent on gaining more influence, but they are also prepared to defend world views that may differ from the prevailing consensus.”
In these conditions, agreeing on a ‘grand bargain’ (addressing issues such as free trade, changes in the rules of the game in international forums and more flexibility for the yuan), while more critical than ever, is also less likely unless the US and, even more, the European states are ready to make significant concessions.
Meanwhile, the debates over the concept of ‘uncertainty’ are an acknowledgement that the mechanics and the dynamics of globalisation — and especially financial integration — have yet to be decoded. “Although the central scenario for the global economy remains sanguine, there are ‘fat tails’ in the distribution of probabilities regarding the global economic and financial outlook.
“Tail risk remains improbable but no longer implausible. Should this occur, one can be only moderately confident about the chances of the “old world” global coordination mechanisms persisting,” cautioned Cailleteau in the report.
