Tuesday, July 26, 2011

Gloomy Outlook for Global Economy

Since the end of the academic term, I took a short break from writing economics. I am fortunate not to be a chief economist for any of the major economies. At the moment, there is no chance for them taking a break; in fact the state of the global economy seems to get more gloomy as the year progresses.

In both the US and Europe, there is the twin problem of stagnant growth and large budget deficits. (Growth and debt)

It seems no one has managed to tackle one without compromising the other objective. Several countries have made impressive attempts to reduce government spending and tackle their budget deficits. However, the deflationary effect of lower spending has led to a further round of negative / sluggish economic growth.

The fall in UK GDP in the last quarter of 2010 could perhaps be attributed to a blip (bad weather / one off shock). But, news that the growth rate slowed down April - June (0.2% growth in Q2 2011) is confirmation that the economy is stuck in a prolonged period of underperformance.
Note: quarterly growth of 0.2% will still lead to an increase in spare capacity.

The government spent considerable energy telling the public we need large spending cuts, unfortunately an inevitable consequence of that is that consumer confidence has fallen and the slowdown has become self-fulfilling.

Unfortunately, new policies such as a 'growth agenda' seem to carry little weight when weighed up against the level of spending cuts (many of which haven't even been implemented yet._

At least the UK, has been able to reassure markets, and avoid the difficulties faced in fringe Euro members. UK Bond yields have remained low, suggesting
  • either markets were reassured by promised spending cuts
  • or there was no need to cut spending so quickly given markets are willing to lend at low rates.
However, if the UK gets stuck in persistent recession or zero growth, markets will start to worry as the debt to GDP ratio inevitably increases.

Another boon for the UK economy is that we don't have to go through the histrionics of the US Political system. It seems the US is doing it's best to create a real crisis over wrangling about the debt ceiling.

Clearly, given state of economy, the US needs to allow its debt ceiling to rise. In the long term, to reduce the structural deficit they will need a combination of spending cuts (changing social security and health care spending) and higher taxes. But, there are very strong political pressures in the US to avoid any kind of tax increases, making job of long term deficit reduction difficult.

1 comment:

rigel said...

it is a depression,
.2% is a margin of error not a growth figure. The coalition is borrowing more that labour was.

Inflation has a robust figure though...

when do the Austrian school monetarists start to doubt their 'science' ?

Austerity will inhibit recovery, we need the the 'american system' of alexander hamilton , we need dirigism , we need government created interest free credit for production , we need huge infrastructure projects without borrowing from banks (like FDR's TVA) , not IMF fiat QE3 bailouts to the zombie banks.

plus a 1% sales tax on the city and my children might have lives like ours !