The important economic questions to ask this summer

It is time for a reset. Too much has happened over the past six weeks for us to be able to think clearly about the economic future of 2017 and beyond. Here we have been preoccupied, quite understandably, about the consequences of the Brexit vote, but that has been only one of many uncertainties. In Europe, terrorism and fears of it have taken hold. In the US, there is an election looming and the noise of that is starting to drown out the signals from the economy. In Japan there has been a marked shift of policy, but little sign of any effect. And in China politics have obscured economics: is reform stalled?

Whenever there is a deluge of information the best thing to do is to take a holiday: step back, eat well, go sailing, whatever. It is nearly August, and while things will happen next month – we will probably get a cut in UK interest rates next week – we will have to wait until the end of the holiday season before we have much of a clue as to how the world economy will develop next year. And it is the world economy that matters to all of us, for if it continues to grow at a decent rate, blows to confidence such as the one from Brexit become much more manageable, and of course vice versa.

What then should we be pondering over the next four weeks?

Start with the big. The biggest question of all is when the next cyclical downturn strikes. We know there will be one, however hard it is to accept this rather basic lesson of the past half century. But you usually get recessions when the world economy is running too hot, and we are not doing that at all. So maybe not in 2017. Rationally, because the growth phase has been so slow and we started from such a long way back, the expansion should carry on much longer than usual. Perhaps too, our fear protects us. When we stop worrying about a cyclical down, that is the moment to become really scared.

However, at some stage in the next few years, maybe next few months, the ultra-low bond yields will be recognised as unsustainable. When that happens the loss of wealth from falling bond prices (which move inversely to the yield) will become a serious drag on growth. We know this will happen; we just don’t know when.

That leads to a further huge question: will the rest of the developed world experience the sort of stagnation currently evident in Japan? It is an obvious concern and there are parallels between Europe now and Japan 20 years ago. But Europe is fundamentally different from Japan in that it is extremely diverse and does not have the same demographic phenomenon of an extremely ageing population and virtually no immigration. Parts of Europe may increasingly resemble Japan, but not the continent as a whole.

The future of Europe is, however, quite fascinating, particularly from the semi-detached (soon more semi-detached) perspective of Britain. I suppose one strand of this debate is whether, now that the UK has signalled it would prefer a somewhat more distant relationship with Europe, would Europe prefer a more distant relationship with the UK? A hostile response to Brexit would signal they did. I think we should not pay too much attention to the bumpy discussions of the past few weeks, but come the autumn we will have to figure out what the deal on offer is likely to be and how we should respond to it.

The US, surely, is less worrying. The basic point here is that the President proposes and Congress disposes. The President has his or her “bully pulpit”, the expression of Theodore Roosevelt, but the test of effectiveness is whether things get through Congress. In any case under normal circumstances the economy trots on regardless. Only in extreme circumstances, such as those inherited by Barack Obama, does the White House have a crucial role in underpinning support. Finally, whatever you think about US politics, the Federal Reserve is in safe hands, and that is a huge source of comfort not just for Americans but for the rest of us too.

I don’t think we will learn anything new about Japan. It remains the third largest economy in the world but successive efforts to generate growth have failed. In terms of living standards it is not doing at all badly, but these come in the form of lower prices rather than higher incomes. The public debt burden remains huge and reform remains stalled, but what happens there does not materially affect the rest of the world.

China does have the capacity to change the world, but I suggest the thing to look for will be the nitty-gritty of imports and exports, and practical indicators such as electricity consumption, car production, and steel output, rather than financial indicators such as money supply. We know China is seeking to devalue further to support demand but I don’t think we know enough about the linkages in the Chinese economy to do more than observe what actually happens, rather than listen to what policy-makers say.

What I think is worth remembering is that the emerging world, taken as a whole, supplies more than half the incremental global demand. In other words, as far as future growth is concerned, they are more important than we are. That, perhaps, is the most important thing to reflect on over our holiday season. The West matters massively of course, and will continue to do so. But every year we matter a little less and we should reflect on that.