I don’t want to ruin your weekend, but there is misery nearby. In Spain, value added tax was increased at the start of this month from 16 per cent to 18 per cent on general goods. Public pensions have been frozen and unemployment benefit cut. Those who work in the public sector have seen a pay cut of five per cent, a move that last month led them out on to the streets. “We are talking about 100 euros a month,” explained office worker Javier in Madrid. “I thought things were bad when my wife lost her job, plus I have to support her sister’s family and now on even less per month.” Among Spanish youths, the jobless rate is estimated at close to 40 per cent. In some areas, such as Cadiz on the south-west tip of Spain, a third of the working population have no job. Spain is not alone. Greece, Latvia and many others are also experiencing tremendous hardship, in spite of pulling back from the abyss of bankruptcy. The jobless news from the US is awful, too. And though economic growth has improbably resumed in Ireland after two years, the country also recently registered a record number of unemployed. In the UK George Osborne, the new chancellor, recently gained praise for a budget that impressed the financial markets with its plans to slash public spending. But the restoration of credibility to the nation’s finances will be accompanied by unemployment for hundreds of thousands of people. Unless many more jobs are created privately than are lost publicly, economic recovery will be very painful. Even the recovery itself is not a given. Everywhere in recent weeks there have been signs that the global economy is still in a precarious state. We might be heading for the dreaded “double dip” – a false recovery followed by a fall as bad as or worse than before. International freight shipping prices – a good indicator of how much is being bought and sold around the world – have almost halved since the end of May. Share prices are well down on three months ago. Jim O’Neill, chief economist at Goldman Sachs, recently fretted that growth in China was slowing down. And he said that the US was also stumbling: “The housing market indicators have turned especially weak again… and even more importantly, the few other areas of strength are showing signs of tailing away.” Olivier Blanchard, chief economist at the International Monetary Fund, said this week: “While we predict the recovery will continue, it is clear that downside risks have risen sharply.” This is economic speak for a weather forecast that prompts you to leave the house with sun cream, umbrella and snow boots. The world seems to have reached another critical economic moment with very little consensus on the right path to take. The argument is about when to settle the bill for the trillions of pounds that it cost governments to avert disaster in 2008-09. All that money was borrowed from investors and there are now questions over countries’ creditworthiness. Greece almost went bust, and may yet do so. As a result, other countries, goaded by international organisations such as the IMF and European Central Bank, have been falling over themselves to prove their soundness by cutting outgoings through austerity programmes. These governments say they are taking action partly to calm financial markets and partly because the uncertainty over state finances is preventing businesses from making clear investment decisions about the future. Who wants to build a factory in a country so broke that corporation taxes are going to have to go through the roof? But is all this austerity really the right thing to be doing? The world’s economic recovery can come only when people or governments buy the stuff that businesses are making. So far demand has been kept high by government spending. You’ll recall the car scrappage schemes, the huge infrastructure projects in China and the reduced rates of value added tax, as well as the money placed in the hands of banks so that they could continue to lend. The success of those programmes could be leading policy-makers to think that enough has been done. The IMF said this week that worldwide growth would be a very respectable 4.5 per cent this year, before falling a little to 4.25 per cent in 2011. But will private businesses and households be able to survive once the government fire hoses have been turned off? The IMF also says, unhelpfully, that in advanced countries there is a “slowdown in private demand growth”. It is true that, in the UK, scare stories that the recession would leave three million people without a job haven’t come true. But the Organisation for Economic Co-Operation and Development warned that the UK’s “economic recovery could be too muted to result in strong job creation and that unemployment is likely to recede only slowly”. It is worse for governments that the traditional spur for private demand – reduced interest rates that encourage people to find better uses for their money than accruing bank account interest – cannot work. Interest rates are already at rock bottom. Paul Krugman, the Nobel-prize-winning economist, is worried. “For the last few months,” he wrote recently in the New York Times, “I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favour of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.” Not everyone sees it that way. Bear in mind the old joke that all the world’s economists laid end to end would not reach an agreement. David Marsh, an expert and author on the Eurozone, points out that, as a result of announced deficit cuts, interest rates on German debt had descended to all-time lows, helping borrowing across the economy. German growth projections have been revised upwards and unemployment is down. There may be signs that US exports are slowing, but German exports to China were up a whopping 58 per cent in the first quarter. “The German newspapers are talking about a 'Summer miracle for the German economy’,” he said. Actually, as any schoolchild knows, if you laid all the economists end to end around the world, two thirds of them would drown. But spare them this fate for now. Austerity may be the right thing for some countries. Timing is all. Politicians’ accounts of their plans are part smoke and part mirrors anyway. In the US, where the White House is perceived to be preaching further economic stimulus, strict budgetary rules will soon see deep cuts in key regions such as California. The Germans and the Britons talk a good game about austerity, but the big cuts are not scheduled to start for many months. They could always be changed. European Union officials say that demand curtailed in China and deficient within the Eurozone may be compensated for in other emerging markets. All the same, it will be amazing if Germany can sustain its recent run without recovery in private demand in many of its largest markets. One further cause for worry is the apparent death of international co-operation. At the time of the G20 meeting in London in April 2009, enormous effort went into the appearance of unity: a global combined effort to work together, avert trade wars, fix the system and survive. Last month’s G20 in Toronto was viewed by many participants as a waste of time. Countries are all largely doing their own thing and that alone is fuelling fears of a rerun of the 1930s depression, when trade barriers killed economic recovery. But at least the current group of world leaders has shown the willingness to co-operate when the situation truly demands. The time to worry will presumably be when they start being friendly again, and preparing heavily pregnant joint communiqués. * Additional reporting by Fiona Govan and Philip AldrickA whole world of uncertainty
Consensus about the global economy? You’ll be lucky,
says Adrian Michaels.
Sunday, 11 July 2010
Posts
