Regular readers would not normally turn to me as a source of optimism. Yet, in the middle of the current all-enveloping gloom about the world economic outlook, while not exactly optimistic, I find myself nothing like as pessimistic as the markets seem to be.
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Their gloom has begun to affect most commentators and may, I suppose, lead to a widespread fall in confidence in the real economy which could then produce, unnecessarily, the very thing that the financial markets are concerned about.
So, would be the markets to worry? Supposedly, they look into the future in a cold, calculating, rational way. Not for them the swings of emotion that affect human beings in the remainder of their life. Well, that’s exactly what the financial textbooks say.
Yet we know that markets can occasionally succumb to euphoria. Former Fed chairman Alan Greenspan once known their “irrational exuberance”.
They were irrationally exuberant about tech stocks during the Internet boom and then they were irrationally exuberant about both the American property market and the ability of derivatives and various forms of financial engineering to magic risk from the economic climate.
But if the financial markets are able to irrational exuberance, then they should surely be also able to irrational despair. I believe that is what is happening right now. Every item of news seems to be interpreted bearishly.
So, when the Swedish central bank a week ago cut rates of interest in an attempt to raise the economy, which was interpreted like a signal that things should be really bad. Ditto each fall in oil prices. Just as we thought we were clawing our long ago following the disaster of 2008-09, we’re now experiencing a succession of false dusks.
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What is the current gloom of market participants and commentators founded on? I think that it is partly reply to their failure you may anticipate the economic crisis and also the subsequent collapse of output. They are determined to not be trapped again.
But as searching for solid causes of pessimism instead of psychological analysis, I guess most people’s answer would be the trouble in China. Yet everything has happened in China is really a slowdown in the rate of growth.
This slowdown has stopped well lacking a recession and doesn’t look as if it is going to develop into one. Indeed, several indicators claim that the Chinese economy has stabilised, albeit in a reduced growth rate than the usual few years ago.
Over and above China, of course, but partly related to it, there’s been a collapse in oil and commodity prices. This has brought severe pain to people companies and countries that produce this stuff. In principle, there should be offsetting gains for their consumers but, as I wrote before, these gains are small and widely dispersed.
Why aren’t more people banging on about eurozone weakness, rather than China, because the reason for the world’s travails?
Consequently, even when they equal to the same amount as a whole, they don’t make as much impact.
And there’s a clear asymmetry regarding solvency and credit risk. Umpteen companies, as well as some countries, might be sent within the edge by the fall in oil prices but nowhere will a default or bankruptcy be averted because oil consumers’ real incomes happen to be boosted with a trivial amount. Nevertheless, low oil prices are providing a lift to a lot of countries, including the U.K.
Recently, another ingredient has entered the mix – namely the apparent weakness of major banks. This seems to have its root in the supposed adverse consequences of negative rates of interest for bank profitability, possible contact with those companies and countries which have lost as a result of the fall in oil and commodity prices, and general exposure to the softness of the world economy.
In fact, even though the banking system remains weak in a number of countries, there has been a good deal of progress because the crash. Moreover, the financial institution lending and cash supply figures do not claim that the machine as a whole is in crisis.
Moreover, the planet economy keeps growing by between 2 percent and three per cent per annum. Admittedly, this is slower compared to rates of growth registered prior to the 2008-09 crash. Aggregate demand has not grown strongly enough since then to come back the world economy to normal. However the reasons for this aren’t the same as what is commonly supposed. The Chinese slowdown is just one contributor, and indeed a small one for us here in the U.K. British exports to China, although growing rapidly, are small. Ireland is really a bigger marketplace for us than China.
An important source of weakness on the planet economy is the eurozone, which has still not got back to the pre-crisis degree of output.
By contrast, the U.S. and U.K. are 10 % and 7 percent respectively above their pre-crisis levels. Imagine just how much better the planet would now look when the eurozone had managed exactly the same rise in GDP because the U.S., or even the united kingdom.
Admittedly, it did manage development of about 1.5 per cent last year – that was good by its low standards – however it now appears to be slipping back.
We are all aware why the eurozone has been so weak. It’s a combination of the stranglehold on the weaker peripheral countries wrought with a loss of competitiveness, excessive debt levels and fiscal stringency; the persistent tendency to underspend in Germany and also the Netherlands; and also the pronounced structural problems in France. The very first two are a direct consequence of the euro.
It is now widely acknowledged that the euro has been an economic disaster for Europe. It is still not widely perceived, though, that it’s additionally a leading factor behind the weakness from the global economy. The eurozone economy is larger than China’s. Moreover, its current account surplus is larger, too.
Why aren’t more people banging on about eurozone weakness, rather than China, because the reason for the world’s travails?
Mind you, this specific area of the world’s problems do not look apt to be fixed in the near future.
Perhaps I’ve talked myself into becoming a paid-up member of the pessimistic tendency in the end.
Roger Bootle is executive chairman of Capital Economics.
The Daily Telegraph
