David Folkerts-Landau is a master of equilibrium. Deutsche Bank’s chief economist seldom ventures into public with statements that can be interpreted in only one way, let alone a provocative declaration.
But things were considerably different one evening shortly before Christmas, when Mr. Folkerts-Landau held a private dinner to discuss global economic perspectives. Anshu Jain and Jürgen Fitschen, the co-chief executives of Deutsche Bank, were two of the guests. Mr. Folkerts-Landau, a Harvard graduate who worked for 15 years with the International Monetary Fund, also invited several other leading global economists to offer their insights.
The picture of the global economy that came out of the evening was anything but balanced.
On one side was Europe, still struggling to recover from the debt crisis of recent years, while on the other is the United States, bursting with energy and, more so even than China, the great source of hope for the global economy.
The U.S. consumer is the most reliable in the world. David Folkerts-Landau, Deutsche Bank’s chief economist
Mr. Folkerts-Landau sees a “lost generation” emerging in Europe. He isn’t predicting a sharp downturn in the economy or a “deflation spiral,” but rather, laments a continent that is wasting away with “little growth, high unemployment and growing debt.”
This, he argues, is the price that will be paid for the euro having been wrongly constructed and for the lack of reforms needed to strengthen it. Mr. Folkerts-Landau expects only 1 percent growth in the euro zone in 2015.
The view of the U.S. economy, which Deutsche Bank expects will grow by 3.5 percent in 2015, is starkly different.
The economist is almost rapturous in his outlook. “Debt reduction is progressing, the banking sector is strong, the real estate market has recovered,” Mr. Folkerts-Landau said. “The U.S. consumer is the most reliable in the world.”
He said the American economy is “autonomous” and not as dependent on the global economy.
In fact, seven years after the outbreak of the financial crisis, the United States has once again become the global economy’s anchor, particularly now when the world economy appears more fragile than it’s been in a long time.
Not 1,500 kilometers (930 miles) southeast of Berlin, a war between Russia and Ukraine threatens to escalate. In the Middle East, a new terrorist group calling itself the Islamic State is setting fire to the entire region. The number of refugees dislocated by conflict hasn’t been this large since the Second World War. Plunging energy prices are redistributing economic weight around the globe.
And always, of course, there is the euro crisis, which remains the major predetermined breaking point of the global financial system.
America towers over this chaos, at least economically. The International Monetary Fund expects annual growth of more than 3 percent in 2015. With that, the U.S. could make up about 22 percent of global economic growth this year. For the first time in many years, this could match a newly industrialized China, the world’s second-largest economy, which is expected to contibute about 23 percent of global growth.
Another aggravating factor is the potential for rising interest rates in the United States likely to happen in 2015 - to the detriment of emerging nations such India and Brazil, but also the European Union.
The energy boom isn’t the only reason for the United States’s new strength, though thanks primarily to fracking, the country now is an energy exporter. The extraordinarily flexible labor market within the U.S. has contributed greatly to this dynamic. America has reduced its unemployment rate by 1 percentage point per year since 2009 with the unemployment rate possibly falling below 5 percent in coming years, Mr. Folkerts-Landau said.
So, despite China’s forecasted growth rate of 7.1 percent, the U.S. will be the big winner of 2015. The largest losers outside Europe will primarily be major energy exporters such as Russia and Venezuela, where growth is estimated at minus 1 percent, and Japan, where the IMF forecasts growth of only 0.8 percent.
While that’s an improvement over growth of just 0.3 percent in 2014, Japan, the world’s third-largest economy, remains the best example of what occurs when a country pursues an extremely loose monetary policy in an aging society over a long period of time. The policy may alleviate the symptoms in the short term, but Japan’s central bank has been unable to solve the nation’s problems.
Monetary policy problems harbor great risks not only for Japan, but for the entire global economy.
Among emerging countries, Russia will likely take the greatest beating. Although the IMF has said it expected 0.5 percent growth for Russia, the latest developments ― a drastic drop in the value of the ruble and plummeting crude oil prices ― weren’t factored into the forecast. The Russian economy tumbled almost 5 percent in 2014 and experts predict a drop of this magnitude for 2015, too.
Another aggravating factor is the potential for rising interest rates in the United States. The Federal Reserve remains coy about when it will increase its benchmark rate for the first time since 2006, but the day will come and experts agree it will arrive in 2015, to the detriment of emerging nations such India, Brazil, Indonesia and Turkey.
Experience has shown that a U.S. increase in long-term capital market interest rates always results in the flight of capital out of emerging nations, especially those with large current account deficits. The European Central Bank could also barely defend itself against the flood of capital out of weak euro countries. Why would investors buy Spanish government bonds at 1.7 percent interest when substantially more secure American bonds might bring 4 percent?
The strong dollar, coupled with an interest rate turnabout, increases risk factors for other emerging nations. It’s not just the Russian ruble that’s dropping like a stone, having lost half of its value against the dollar since early 2014. The currencies of other emerging nations also have lost about 15 percent of their value. This downward trajectory likely will grow stronger.
In the view of emerging markets, the problem is that their companies companies are at least $4 billion (€3.32 billion) in debt, solely because they have used dollar-based loans and bonds, according the statistics from Bank for International Settlements. Weak local currency makes repaying far more difficult and threatens to create overindebtedness, which in turn weakens growth and causes more indebtedness.
This is precisely why so many economic experts including Mr. Folkerts-Landau are warning about the spiral of high debt and low growth in southern Europe, which creates conditions for a “lost generation,” because the process of emerging from debt could take decades.
Even if the ECB holds everything together in Europe, monetary policy cannot replace this painful process of adjustment, said Mr. Folkerts-Landau.
After so many gloomy predictions, Mr. Folkert-Landau delivers a conciliatory message befitting the recently concluded Christmas holiday.
Perhaps in 20 years, he said, “Europe can once again be a model.” This is largely because the “soft factors” that are part of the European culture are increasingly important in the business world, he added, including rule of law, social mechanisms for resolving conflicts and, above all, social cooperation.
Jens Münchrath, based in Düsseldorf, leads Handelsblatt's coverage of economics and monetary policy and has been with the newspaper since 2013. To contact the author: [email protected]