Is global growth back? PDF Print E-mail
Thursday, 24 January 2013 00:00
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It all depends on US since Europe is looking good

After several successive quarters of lowering GDP estimates of global growth, the IMF too seems to be seeing a global recovery, albeit a weak one. After lowering 2013 growth estimates from 4.1% in April 2012 to 3.6% in October and to 3.5% in its latest World Economic Outlook, the IMF is looking at a 4.1% growth in 2014. This is a long way from the 5.1% growth of 2010 (or the pre-crisis 5.4% in 2007), but is a promising start to the recovery, largely driven by the US—from just 1.8% in 2011, US GDP averaged 3.1% in the first three quarters of 2012. The Euro area, by contrast, is expected to remain in recession in 2013 though the IMF projects a 1% growth in 2014, keeping in mind perhaps the obvious signs of recovery—Spanish 10-year yields have fallen from 7.4% at the time when ECB chief Mario Draghi announced his bond buying programme last July to 4.9% now, and Italian ones are down from 6.4% to 4.1%. Labour costs in Spain and Greece have been falling to narrow the gap with Germany; as a result, Spain has been able to run a current account surplus for the past three months. If all goes to plan, then, global trade growth is also likely to improve, the IMF projects a 5.5% growth in 2014, up from 3.8% in 2012 but nothing compared to 12.6% in 2010.

While the chances of the Republicans still playing hard-ball can’t be completely ruled out in the US, the turnaround has really been driven by the sharp revival in the housing market—so, after four years of austerity, just 16% of household budgets in the US are devoted to debt service as compared to 19% in 2009, freeing up a lot of money to spend. It helped that sensible policies like those which encouraged fracking have, according to a calculation by Reuters Breakingviews, resulted in energy savings of around $926 per household—to put this in perspective, the tax impact of the fiscal cliff not being resolved would have been higher taxes by $3,446 per household. The overall revival, needless to say, was the result of a very sharp government response even though recently-released Fed transcripts of 2007 suggest it failed to appreciate the severity of the crisis initially.

It is in Europe that the real problem lies. Paolo Manasse of the University of Bologna brought this out quite starkly in his column Eurozone crisis: It ain’t over yet (FE, January 22) when he pointed out labour rigidities in Europe have prevented the appropriate level of restructuring from taking place—so, after a sharp hike in unemployment, this has fallen in the US while it continues to rise in the eurozone. As a result, while US 2012 output is above 2006 levels by 7%, that in the eurozone is up only 2%. As Manasse points out, the expansionary stance of the government as well as the size of the central bank’s interventions have been much smaller in the eurozone even though the fall in output has been higher. Part of the problem, as the IMF admitted in a mea culpa by its chief economist, was that economists underestimated the impact of contractionary fiscal policies. Hopefully, with the lesson learnt, the world can move on. The state election that Chancellor Merkel lost over the weekend puts a bit of a shadow over that since the future of Europe will depend on how she fares in the September general elections.


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