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Speech at the Conference on the Next Global Economic Crisis

Сhief Economist of the Eurasian Fund for Stabilization and Development took part in the plenary panel of the HSE conference on the next global economic crisis

28 November 2019

Eurasian Fund for Stabilization and Development’s (EFSD) Chief Economist Evgeny Vinokurov made a presentation at the plenary panel of the VII HSE Conference on the Global Economy. EFSD is a regional financing arrangement with six member states and a total portfolio of $5.3 billion. It comprises 15 sovereign policy-based loans, project loans and grants. EFSD is a part of the global financial safety net.

Responding to its mandate, EFSD analysts are primarily responsible for economic analysis and projections of its member states, with particular focus on assessing the impact of external vulnerabilities on countries’ debt and fiscal sustainability. According to the Chief Economist, EFSD analysts’ primary job is ‘to think of bad scenarios’, to conduct stress-testing and constantly remind its member states of risks and the ways to mitigate them.

This approach is particularly important given rising uncertainty, with the global economy having experienced several quarters of slowing growth. While a recovery might be in sight, several headwinds are at play, including elevating trade and geopolitical tensions, uncertainty surrounding economic activity in the EU and especially in Germany, and Brexit. Particularly worrisome is the constant deterioration in global trade. In 1H2019, its volume came at just 1 percent above its value in 1H2018, which was the slowest pace of growth since 2012. It is generally a bad sign as the big wave of economic growth of the last decades rode on the very efficient functioning of the global value chains.

Elevated debt also rises serious concerns over the economic outlook. Accepting the rationale of high public indebtedness (when it is primarily driven by the desire to enhance economic performance), the chief economist stressed its ‘darker side’. Growing debt burden, which has worldwide reached 230% of total output, reflects raising fragility of countries to economic volatility. In these conditions, any macroeconomic shock can run up to persistent economic crisis. The private sector’s indebtedness is also high. Private sector was the main driver of debt accumulation over the last decade. It has pursued divergent targets of borrowing, which were not only motivated by investment growth. The results of debt accumulation can become even worse, given weakness of economic performance, backed by consumption growth and not by investment.

Given today’s high debt level and a deterioration in global growth, there is a question on the agenda whether an economic weakness is structural or reflects an unusually persistent negative shock. Implying the cyclical nature of the current economic slowdown, most central banks turned to more accommodative policy. As a result, the speaker summarized the world economic outlook for the years to come as ‘3Ls’ - low rates, low inflation, and low growth. The baseline scenario implies that the global economy may stay for longer in the reality of '3Ls’ due to high uncertainty and very cautious business expectations. In this framework, the lax monetary policies would continue as the world’s leading monetary authorities really have anything left to do. National authorities, in turn, would have to opt for more fiscal stimulus. However, fiscal space in most countries is limited.

Growing economic turbulence compels the macroanalytical community to spend much more time on formulating and discussing stress testing for the world, regional, and national economies. Evgeny Vinokurov stressed that 'Macroeconomists around the world spent too much time drafting and discussing their baseline scenarios and too little time discussing results of stress testing. Of course, a balanced and consistent baseline is still necessary. Nevertheless, one cannot rely only on the baseline scenario alone. By focusing more on stress-testing, we can estimate the sensitivity of the national economies to different types and scopes of external shocks and internal developments’.

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