Events The Global Economy and Policy Challenges

Date: Wednesday, November 7, 2018. 15:30 – 17:00
Location: Reception Hall, Main Building, Tsinghua University
Dr. Jacob Frenkel, Chairman of JPMorgan Chase International

During the afternoon on November 7th, students gathered to hear insights from Dr. Jacob Frenkel on the future of the global economy in a lecture hosted by Dr. Zhu Min.

“Given the previous decade of financial turmoil, can we throw away the old economic policy textbooks away?” Dr. Frenkel asked. Throughout the rest of the afternoon, the audience was led on a break-neck journey through current economic growth, monetary policy and the Global Financial Crisis (GFC), normalisation, global trade and the long-term outlook in order to answer this question.

Using slides discussed at the Annual Meeting of the IMF and World Bank in October 2018, Dr. Frenkel explained the background to current global economic growth, for the industrial world and for the developing world. Through comparing results from the 1990s up to 2018, the dramatic change in the centre of gravity for the economic world was apparent. Dr. Frenkel highlighted that it is unlikely that this change is episodic and that the real question is whether the industrial world is ready to accept this new reality of growth rates.

The challenge remains how to set monetary policy in this brave new world.  Throughout the GFC, a wave of unconventional monetary policy became mainstream and saw quantitative easing from banks globally in a bid to stabilise their markets. However, whilst all markets entered the GFC at the same time, they have each travelled down the route to recovery at different paces and are nearing normalisation against different time-scales. Dr. Frenkel drew on the common global goal of attaining a 2% inflation target throughout the recovery but also raised the question of whether this single-minded goal could threaten financial stability, despite very transparent monetary policy.

The other key measure in the route to normalisation, explained Dr. Frenkel, is the unemployment rate, something that also sees discrepancies between industrial markets. Not only are there huge differences between the current US unemployment rate and the overall Eurozone unemployment rate, but also between Eurozone countries, for example Germany’s 5.1% to Italy’s 10.1% to Greece’s 18.4%. This poses yet another challenge to monetary policy and highlights the need to change Eurozone structural policy instead. However, against this European backdrop, and significant US progress in the unemployment rate, Dr. Frenkel asked what the next step in US monetary policy should be. Should the US factor-in international recovery rates or, whilst being transparent over their policy, focus on their own recovery rates and press forward with normalisation? There are pros and cons to each path.

Looking forward into the longer-term, Dr Frenkel considered the fiscal challenge of changing population distributions. By 2050 the world population is expected to grow by 2.4 billion people, however this would not be evenly distributed over age groups, or even across markets. The industrial world will, in general, see smaller increases in population, even shrinking by 25 million in Europe, and an aging distribution. However, the developing world will see an enormous increase in population, for example 1.3 billion more people in Africa, and greater balance across demographics. As Dr. Frenkel pointed out, aging populations not only stretch a market fiscally, but also lack the potential for innovation found in younger populations – yet another challenge to the global economy.

By Holly Holdsworth