Staying focused on the real challenges of growth
With turmoil on the horizon, keeping calm and concentrating on the real issue of growth is the best strategy to adopt.
Global markets have experienced an unusually volatile start to the year, and banking shares are notably under pressure. And yet the disconnect between short-term changes in financial markets and the economy seems real, and anxieties about the macroeconomic environment and the banking sector, in particular, excessive. In my view, the underlying question of markets is the one we should be addressing: are there prospects for the growth of the global economy in the midterm?
The current market turmoil can be attributed to a combination of particularly unsettling factors: geopolitical tensions, a slowing Chinese economy, a persistent plunge in oil prices, changes in interest rates, the risk of inflation, and growing scepticism over the efficiency of monetary policies. These factors are accumulating to create a high level of anxiety, but their short-term impact on the global economy is likely overestimated.
Indeed, the economic prospects of developed countries remain stable on the whole. The situation has improved somewhat in the United States and the European economic recovery is set to continue, even if it does so moderately and very gradually. These countries benefit from low energy prices, a weakened Euro vis-à-vis the dollar, and particularly attractive funding conditions due to the accommodative policy of the ECB. This is the case in France as elsewhere; emerging markets certainly show contrasting situations. If oil-countries are suffering, many developing countries benefit all the same from this inexpensive energy. Briefly, over the short term, one must view current market movements with a little perspective.
We must, for that matter, accustom ourselves to living with greater market volatility. Herein lies a paradox: with the accommodative policies of central banks, there are many funds available, a great deal of money that can be invested. At the same time, decreased liquidity in certain asset classes results in very significant price movements from one day to the next or even in a single day. Swell movements are greater and the foam thicker at the peak of the waves.
The key question regarding markets is that of the mid-term: what are the prospects for the growth of global economies in the years to come?
The factors contributing to anxiety about the banking sector are also overestimated, and of a different nature than those leading to the 1998 crisis. The banking sector has in fact grown considerably stronger in terms of equity, liquidity and the quality of balance sheets. For example, Societe Generale has never had such solid financial ratios as at the end of 2015. As regards exposure to the oil and gas industry, given its limited representation on the balance sheets of banks, it does not constitute a systemic risk. The current questioning of the market is based more on the profitability of banks than on their solidity. Particularly in light of the interest rate environment, the spiral towards negative rates and the tendency of banking regulations towards increasing capital, markets are doubtful of the sector’s ability to sufficiently reinvent itself and obtain profitability in line with the cost of capital. Gradually, a higher level of reasoning and discernment should come into play…
However, as I stated earlier, the key question regarding markets is that of the mid-term: what are the prospects for the growth of global economies in the years to come? Are we, like Japan, in the midst of a long cycle of weak growth, notably for European economies? Faced with these legitimate questions, I remain convinced that our attention should be fully focused on the overhauling of our growth models and on structural reforms, aiming for a model that relies less on debt accumulation and more on innovation, structural competitiveness and productive investment.
In this changing environment, each business sector as well as each company must adapt its models of growth and profitability, discerning immediate turmoil with prudence and anticipating future challenges relating to new technologies.
Each country must meet its own competitiveness challenges and pursue its own reforms in order to build durable growth models. The support of accommodative monetary policies of central banks, with its perverse effects in the medium term, must be viewed as temporary and exceptional. It is not a durable sound solution. The overhaul of growth models in Europe must rely on greater business competitiveness, with less tax burden and more flexibility in employment, and on cuts in public spending in the framework of a stronger European integration. We must pursue such reforms in order to recover an atmosphere of trust and to reignite the engines of growth and employment.
In this changing environment, each business sector as well as each company must adapt its models of growth and profitability, discerning immediate turmoil with prudence and anticipating future challenges relating to new technologies. This holds true for banks that must respond to a new, particularly complex economic equation: continue to support the financing of the economy and take advantage of digital transformation to invest in client relations, while adapting to increased capital requirements and an environment of consistently low interest rates that erodes the profitability of the sector. Banks must change the way they operate in order to adapt to new economic and digital circumstances.
We must be aware that all these changes at work in our economies, in our business sectors, are structural and will take time.
Amid the storm, let us be wary of irrational anxieties and maintain the long-term view; as it is this transformation that we must pursue.
Frederic Oudea, Chief Executive Officer at Societe Generale