— this post authored by Mark Cliffe, from Voxeu.org
The extended period of low growth following the Global Crisis was denoted the ‘New Normal’ by some. This column argues that the period is still ongoing, and would be more usefully described as the ‘New Abnormal’.
Far from being an equilibrium, the low growth was achieved by progressively more aggressive and unprecedented monetary policy actions, in response to a series of financial panics. Furthermore, the aftershocks of the Crisis are still colliding with a series of profound structural changes to and instabilities in the global economy.
The ‘New Normal’ never was, isn’t, and should be replaced by the ‘New Abnormal’. In the wake of the Global Crisis, the idea that the global economy had entered a low-growth equilibrium gained a curious acceptance. In reality, the situation is far from ‘normal’, and the attempt to characterise it as such has been deceptive, disingenuous, and dangerous.
Instead, economists, policymakers, and investors would be better advised to think of the world economy as being in a period of profound disequilibrium, as the aftershocks of the Crisis collide with and complicate a range of structural changes. Ever since the onset of the Crisis in 2007-08, the global economy has been repeatedly flirting with a descent into an even more damaging deflationary depression. Policymakers have averted this only by a combination of luck, judgement, and experimentation.
Belatedly, Mohamed El Erian – who, along with his former colleagues at PIMCO did much to promote the concept of the New Normal after they first floated it back in 2009 – has just abandoned it. He has argued that “it is no longer unusual to suggest that the West could linger in a low-level growth equilibrium […] Yet, […] growing internal tensions and contradictions, together with overreliance on monetary policy, are destabilising that equilibrium” (El Erian 2009).
However, the suggestion that we have been living through a New Normal ‘equilibrium’ for the past seven years is hard to swallow. Normality suggests that the Crisis is behind us, and that we again understand what’s happening and that we can make predictions. It invites little sense of urgency to make radical policy adjustments. Indeed, it tempts us into thinking policy ‘normalisation’ may be around the corner.
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