Modest growth on the cards despite problems
Jun 2 2010 by Andrew Miller, The Journal
A MONTH ago, it seemed that the global recovery story was "still on the road". Now we are much less sure. For, although the US and Asia are still motoring, one third of the global economy - Europe - looks to be skidding off the road, and may well end up in the ditch.
2010 was always going to be a year in which central banks worked towards “normalising” interest rates and finance ministers started to tighten fiscal policy through both tax hikes and cuts in government spending.
The key issue was always going to be whether such policy adjustments could be simultaneously aggressive enough to maintain the confidence of markets, but also gentle enough to prevent pushing economies back into recession.
Not all policymakers are managing this tricky balancing act. First, Greece had a near-fatal accident with fears of default. As the authorities reacted by tightening fiscal policy very aggressively, markets simply saw that as “digging a greater hole” for the economy – in the form of a sharper drop in GDP and resultant rise in the debt and deficit to GDP ratios.
The tardiness of others in responding to the crisis, and the apparent lack of concern of the European Central Bank president, Jean-Claude Trichet, led to a sharp deterioration, and a bout of contagion in other southern European members of EMU.
The proposed “solution” for EMU’s difficulties – including a £750bn package of support for governments in difficulty – has been seen by some as just a means of buying policymakers more time.
Worse still, the cost of support for countries in difficulty – such as Portugal and Spain – is a requirement that they, like the Greeks, tighten fiscal policy more aggressively, with outright declines in GDP a natural consequence. Widening discrepancies across the EMU will make it even harder to find the right policy balance.
Slower European economic growth will impact on the pace of overall global GDP growth, but should not derail the recovery. The United States, for example, looks set to enjoy an above-potential rate of expansion through much of this year and next, although the still-near-flat personal disposable income profile represents a downside risk.
In Asia too, the recovery appears to be gathering steam, although the authorities have had to work harder to prevent inflation taking root. China, in particular, has witnessed multiple, and aggressive, efforts to curb both asset price inflation and growth.
So this is not a story of “doom and gloom” globally, and we think that a benign scenario – of continuing modest growth – still looks the most likely. But the upside and downside risks to this scenario are more evenly balanced than a month ago.
:: Andrew Miller is regional office manager of Barclays Wealth
