The deceased parrot and the quacking swan – Willem Buiter’s lecture at Economania

On 3 October, Citigroup’s Special Economic Adviser Willem Buiter, one of the leading economists of our age, delivered a lecture on the outlook for, and the challenges facing, the world economy. Mr Buiter was a guest at an event held as part of a series called ‘Economania’ organised by the MNB Department at Corvinus University.

Speaking about the outlook for growth, Mr Buiter said that economic growth is expected to slow in a number of countries and regions in 2020. In the US, this will reflect in part the phasing-out of fiscal stimulus, which has affected the level of output, rather than its growth rate. Another factor pointing to a slowdown is that the federal budget presumably will have to tighten. In China, there are already signs of a slowdown, and, looking forward, robust growth seen in the past is unlikely to return. One reason for this is that strong growth has been associated with an unsustainable build-up of private sector debt; therefore, it will be necessary to deleverage and clean up bad debts accumulated in the past. However, Mr Buiter does not expect a significant financial crisis, as in China loans are typically denominated in the domestic currency, and the country does not maintain a fixed exchange rate regime. The global slowdown will also affect Europe and Japan.

The forecast is surrounded by a number of downside risks. Of the geopolitical risks, Mr Buiter highlighted the possibility of a war against Iran, which could raise the price of oil above 200 dollars. The trade war, particularly frictions between China and the US, also does not support growth. But because only 5 per cent and 3 per cent, respectively, of China’s and the world’s exports go to the US, its impact may be limited. Mr Buiter sees significant risks to Italy’s fiscal plans, which may ultimately affect the entire euro area.

One of the biggest problems in connection with a potential global slowdown or recession is that the major central banks are unlikely to have plenty of room for manoeuvre to ease policy in 2020. According to Citi’s forecast, the Fed will raise its policy rate to close to 3 per cent and the ECB will move it into positive territory by just a small margin. Although Mr Buiter has had ideas on how to eliminate the zero lower bound, he does not think central banks will consider this to be a plausible option. Moreover, there is very limited room available for fiscal policies for further easing; therefore, in a recessionary scenario economic policy will be left almost without any weapon.

The professor also spoke of inflation, which he thought was like Monty Python’s parrot: it is not dead, it has been stunned. Looking at current trends, it can also be said that the parrot is alive. Mr Buiter does not see significant upside risks to inflation, although in reply to a question he said that high outstanding debts (and he expressly referred to Italy’s government debt) may make a tightening cycle more painful. Nevertheless, he does not think that this will be an effective barrier to the ECB’s interest rate policy.

Another question concerned the risks related to the Chinese shadow banking system. Mr Buiter said the problem is a real one but not intractable and requires more comprehensive regulation in accordance with the principle of the ‘duck test’: if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck, even it has been called a swan. In other words, everything must be considered a bank which operates with high leverage and performs a maturity transformation.

Balázs Vonnák

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