Economics News : 26 Nov

November 29, 2010

Economics crises are boring;
here today, and here tomorrow as well.

Binnie Barnes, there’s a suspicion that politicians encourage them to justify their own existence!

Activity is rising, but not accelerating.
A good many countries have now published estimates of GDP in third quarter 2010. A sizeable majority of them (more than two-thirds) reported slower growth after mid-year than before it. That’s consistent with (not proof of) the current business cycle’s having entered into a phase of deceleration.

There’s no immediate risk of recession.
But the numbers do question the politicians’ promises of a broadening and deepening recovery. At best, it looks as if there’ll be progressively slower growth during the next nine months. At worst, there’ll be a new recession in the period thereafter.

End-2011 is the danger period.
It’s not just the business cycle that’ll be operating adversely in this period. It’s likely that the monetary environment will be as well. A number of countries have already thought it necessary to lift interest rates. Several more may be preparing to follow suit.

Credit, by then, will also be tighter.
China, for instance, seems to be fretting that it overdid its monetary indulgence in 2008 and 2009. The policy neutralised the forces of recession, but encouraged those of inflation. Currently, retail prices are rising at about 5% per annum and still quickening. Worse, property prices in a number of cities are soaring at 50% per annum.

China is about to hike interest rates.
The authorities in Beijing know they’ve conjured up a bubble. And they know that the longer the phenomenon is left unattended, the more painful will the corrective therapy have to be. Action is probably imminent, therefore.

India will continue to do so.
India is a year ahead of China in its development of excess demand. Retail inflation is running at about 10% per annum, and the external trade deficit is more than 5% of GDP. The Reserve Bank has raised interest rates several times already—but not by enough. It too is likely to do more in the months ahead.

Commodity producers likewise.
The picture is somewhat comparable in the commodity producing world. In Australia and Brazil, for instance, growth has exceeded potential. The external accounts are in deficit despite strong terms of trade, and inflation is relatively high despite strong currency. The countries are vulnerable to declines in commodity prices; and their Central Banks are thought to want to act in anticipation of the danger, rather than in reaction to it.

And Europe, perhaps by default, . . .
Europe is a little different. But, there too, a tightening looks probable. It’s the euro’s difficulties that are provoking the change. The ECB’s one-size monetary tights don’t fit all the EZ’s economics leg-shapes. Competitive countries want rectitude; uncompetitive ones leniency. Germans (and Dutch and Austrians) would prefer tighter money and stronger currency. Greeks (and Irish and Portuguese and Spanish) wouldn’t.

. . . will revert to monetary orthodoxy.
One group is going to be disappointed. Probably the latter: its economics debilitated; its politics emasculated. If, as seems likely, the EZ disintegrates, there’ll be lots of austerity to share around: the strong countries having chosen it; the weak ones having had it imposed on them!

Will the US and Japan loosen enough . . .
Only the US and Japan are thoroughly committed to accommodative money. And, even in them, the commitment is no more than temporary. Both currently see the risks of inflation as negligible in comparison with those of recession. But both are also fearful of indulging the financial misbehaviour that protractedly easy credit encourages.

. . . to offset tightness elsewhere? Unlikely!
It’s unlikely, therefore, that the monetary environment will stay expansive throughout the whole of the forthcoming cyclical downturn. At some stage, probably in 2012 or 2013, conditions will become fraught. There’ll be a new recession.

Especially if protectionism should be given its head.
It’ll be a bad one if protectionism becomes widespread. Will it? Possibly; it’s the politicians’ knee-jerk reaction to divergent competitiveness. China is the obvious target at the moment, of course. But it’s possible that a rising yuan (the consequence of Beijing’s tighter credit policies) will reduce the justification for trade restrictions.

The UK is muddling along (threatened only by regulators).
Britain tends to outperform in times of adversity. Its numbers have been satisfactory in recent months, and might stay acceptable in the years ahead. The speciality is sophisticated financial services—not banking, but fund management, corporate finance etc. International competition poses only a limited challenge. The threat comes, not from there, but from regulators. Those at home are pernicious; those in Europe worse.

Markets look set to rise for a while longer.
Security prices will rise during the next twelve months; extra liquidity prompting investors to acquire additional assets. Whether the bull trend will continue until the year end is less clear. There’s a risk, by then, of economics fracture and financial dislocation.

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