Still scarred
11 January 2010
As the past decade came to an end, things were looking up. All of the major economies are likely to have enjoyed positive growth in the final quarter of 2009. Most importantly for the world economy, growth in the US – which was the fastest of all of the major industrialised economies in the third quarter – looks to have accelerated, perhaps growing as fast as 4%Q/Q annualised or above in Q409. December’s extraordinary Chinese trade report – with imports up more than 55% compared to a year ago to a new record level – highlighted the important support provided by China to exporters everywhere, not least Japan. And so, at face value, and certainly compared its lamentable state one year ago, the world’s economy was looking in pretty good shape heading towards year-end.
The consolidation of the global economic recovery is certainly a reason to be cheerful as we enter the new decade. Indeed, we do not expect to see a double-dip in output in any of the major economies in 2010. We also reject some of the more shrill commentary about financial strains in the euro area, while contagion from further localised credit events, like November’s shock from Dubai, will be relatively well contained. Nevertheless, the industrialised economies – and some of the emerging market countries too – remain scarred by the deepest and longest recession since the War.
In particular, as illustrated by the disappointing US jobs report for December, the turnaround in labour markets will take time even in the supposedly more flexible economies, with high unemployment weighing on the outlook for consumption. Meanwhile, the vast amount of spare capacity lingering from the downturn precludes a strong turnaround in private investment. Financial sector de-leveraging and the further repair of private sector balance sheets – as well as anticipation of unprecedented public sector retrenchment to come – will also continue to weigh on private demand, possibly for several years. And it hardly seems likely that countries – such as Japan and Germany – which saw muted domestic demand growth during the boom years will suddenly become engines of growth to compensate for soft demand elsewhere.
Therefore, as set out in our latest global forecasts we continue to expect the recoveries in the industrialised economies to be unimpressive and reliant on continued policy support. Of the major industrialised economies, we continue to expect the US to register the strongest growth – of around 3% - in 2010, as the Obama fiscal stimulus package continues to be implemented. But this will make only the slightest of dents in the huge negative output gap, and there remain doubts about the ability of private sector demand to compensate fully once the fiscal stimulus is removed. Meanwhile, in the euro area, the previously sluggish large core countries (Germany, France and Italy) will have to do more of the heavy lifting as the previously dynamic periphery (notably Spain, Greece and Ireland) licks its wounds. As they adjust to the withdrawal of the fiscal incentives that temporarily boosted car sales in the past year, that looks like a recipe for sub-trend growth in the euro area once more. And growth in Japan is likely to remain subdued until mid-year, when the further external impulse from the recoveries in China and the US, as well as a long-awaited turn in the investment cycle, should hopefully place the economy back on a more sustainable recovery path.
While the economic recoveries progress, headline inflation has started to rise in many economies. But this reflects almost entirely the impact of energy prices. Core inflation measures have remained much more restrained, reflecting the huge degree of spare capacity in the global economy, something that is set to persist for the foreseeable future. So the world’s major central banks rightly appear relaxed about maintaining highly accommodative policy. With conditions in the financial system more stable, central banks are starting to run down the extraordinary liquidity support that they provided through the height of the crisis. However, near-term rate increases are not on the cards. We look for the Fed to be first out of the traps, possibly as early as the third quarter, with the ECB possibly not far behind. The BoE, meanwhile, looks set to leave rates at 50bps for all of 2010. For the BoJ, the position is a little different. Faced with no prospect of a near-term end to deflation, it will remain under pressure from Japan’s new DPJ-led government to do more to support the economy. Having already announced a new fund-supplying facility in an apparent sop to political pressure, a further increase in its monthly JGB purchases, from the current ¥1.8tn, could well be on the cards early in the New Year.
Chris Scicluna, Head of Economics
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