Although CFOs may be mired in pessimism about the economy, in fact “the cup is more than half full,” a leading economist told attendees at the CFO Rising conference in Las Vegas on Monday.
While the U.S. economy will grow no more than 2.5% annually for the next two or three years, that will buy enough time for the world’s emerging markets — which are already providing a majority of demand growth — to save the day, said Raghuram Rajan, a professor at the University of Chicago Booth School of Business and former chief economist of the International Monetary Fund.
“Even though the fiscal stimulus is ending, and though the inventory rebalancing that gave companies a kick this year is ending, I think the probability of a double-dip recession is very small,” said Rajan in his keynote address. “There is tremendous opportunity building up in the world economy. It’s not a time to stretch too far, but it’s a time to start becoming more optimistic.”
That sentiment could hardly be farther from the outlook held by many finance chiefs. According to the latest quarterly Duke University/CFO Magazine Global Business Outlook Survey, which polled 937 CFOs in early September, 57% of U.S. CFOs are less optimistic about the economy than they were last quarter, while only 14% are more optimistic.
Indeed, Rajan did sound a few cautionary notes. Because of the high level of debt that consumers have taken on, the U.S. economy will be limited to modest growth in the next few years, he said, no matter how hard the Federal Reserve pushes its monetary policy or whether Congress finds room for additional fiscal stimulus after the midterm elections. Also, it remains to be seen whether Europe will avoid another major debt crisis, said Rajan.
And longer term, while emerging markets are expected to be delivering the majority of the gross world product within 10 years, there undoubtedly will be bumps and hiccups along the way. “There are reports saying these countries are going to grow in a straight line for 50 years,” said Rajan. “That is not going to happen. There will be crises from overinvestment and overconsumption, especially in countries that rely on a lot of foreign debt.”
On the other hand, large U.S. banks look like they will remain healthy for the foreseeable future. Even more important, fears that a sustained, destructive period of deflation are on the way are probably groundless, Rajan said. For one thing, China and some other emerging markets are already experiencing some capacity restraints that will produce inflationary pressures. For another, in a country like the United States, where there is high outstanding debt and politicians can’t agree to either cut expenses or raise taxes, the fiscal situation may assert dominance over the market situation. “At some point the markets are going to take fright and there will be inflationary expectations,” predicted Rajan.
He speculated that if Republicans win one house of Congress in the midterm elections, there could be gridlock on fiscal policy as both sides blame each other and neither wants to allow any movement. But if the GOP were to win both houses, said Rajan, “they would have a responsibility to show that they were part of the solution, and maybe we’d actually get some progress.”