Are we relying on the US and China to pull the world out of its recessionary hole ?

Thursday 28th May 2015

 Are we relying on the US and China to pull the world out of its recessionary hole ?

"Growth wont pick up if everyone uses the same remedy at the same time", The Times, p.41

 A less than entirely optimistic piece from Oliver Kamm ..... The Organisation for Economic Cooperation and Development (OECD) has confirmed the disappointing Q1 growth picture across its 34 member states  --  GDP growth fell to 0.3%, down from 0.5% in the previous quarter. The numbers are worse for the G7 economies  --  a mere O.2% for Q1, down from 0.7%. Nearly 7 years on from the start of the great recession, surely we might have hoped for something better than this ?

According to Mr. Kamm, the root of the problem lies in the method adopted by nations across the globe to stimulate their own economies ...... or rather, the method in itself may be sound, but cannot work if everyone is playing the same cards at the same time.

In essence, stimulus packages have taken the form of aggressive monetary easing in the form of near-zero interest rates and huge asset buying programmes (QE) which drive down bond yields. These in turn drive down the exchange rate. At the same time, tight fiscal programmes (whether voluntary or imposed) aimed at tackling budget deficits put a lid on domestic demand. The conditions are thus right for an exports-led recovery .... at least that's the theory.

Except that someone, somewhere has to buy those exports, and that's why the poor Q1 figures from the US came as a particular disappointment. So who's going to provide the engine for recovery? There are some signs of life in the Eurozone economy, though it's hard to tell how much a recovery could conceivably be derailed by the Greek issue. China is taking steps to redirect its energies more towards domestic consumption rather than exports, which could of course be a big boost to the global economy but even if China is successful these things take time.

 
Most probably and not for the first time, the answer still lies in the US. Fingers will be crossed that the Q1 performance was just a blip and that the US will lead from the front once more. The most recent data suggest that this is possible. Watch out for another revision to the Q1 GDP figure due this week.