STEPHEN ROACH: The Current Speed Of Global Growth Comes With A Major Problem

Stephen roachREUTERS/Jo Yong-HakStephen Roach

The world economy is growing, but not by much.

“Collectively, the annual growth rate in the major developed economies averaged a little less than 0.7% in the first half of 2014,” write economist Stephen Roach in a new piece for Project Syndicate. “America’s paltry 1% growth led the way, while Japan and Europe, whose combined GDP is roughly equal to that of the US in purchasing-power-parity terms, recorded no better than a 0.3% increase.”

Sure, any amount of growth is better than no growth.

However, we’re certainly more vulnerable than we could be. Here’s Roach (emphasis added):

But there is another problem with persistently subpar growth: It provides no cushion to shield economies from unexpected blows. That is especially true when growth falls below 1%, leaving a thin margin between expansion and contraction. Such sluggish performance is the economic equivalent of “stall speed” — the heightened vulnerability that aircrafts can encounter at low velocity. Under such circumstances, it does not take much to lead to an aborted takeoff, or worse.

The analogy is all too apt today. Shocks, whether traceable to weather, geopolitical disturbances, strikes, or natural disasters, are the rule, not the exception. When hit by them, vigorously growing economies have cushions to withstand the blows and the resilience to shrug them off. Economies limping along near stall speed do not. The odds of a recessionary relapse in an environment of unusually weak growth — very much the problem today — should not be minimized.

Roach isn’t the only veteran economist sounding this warning.

“We are running out of buffer in the economy,” former Fed Chair Alan Greenspan said in July in reference to the U.S. economy. “We don’t have the capability should, for example, we run into a major conflict in the Middle East or elsewhere where it requires a major increase in our defence budget. Our defence budget is heading in a direction where in a couple, two or three years it will be at the lowest level relative to GDP since before World War II. We don’t have the physical resources to respond.”

A wider margin of safety would certainly bring more comfort.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.