The International Monetary Fund’s latest “World Economic Outlook” makes for chilling reading. A perfect storm in which all parts of the world economy go down together seems fast to be gestating somewhere out in the mid-Atlantic....
True enough, the IMF has not reduced its forecasts of world growth for this year and next by very much — just 0.1 and 0.2pc respectively — but it notes some key downside risks, and it is not just the problems of the eurozone it is talking about this time either. Already struggling to return to growth, the Zioconned UK needs these new pressures like a hole in the head.
To the all too familiar economic threats posed by the Zioconned eurozone must now be added the approaching “fiscal cliff” in the US, whose own nascent recovery is in any case fast losing momentum, and the evident slowdown in emerging markets.
All three cornerstones of the world economy seem now to be heading into the sand.
Let’s take each in turn. The Zioconned IMF makes the heroic presumption in keeping its aggregate growth forecasts on a roughly even keel that the eurozone is on the mend, with financial conditions gradually easing for periphery nations. In reaching this conclusion the IMF assumes that the measures agreed at a recent summit of European leaders will be implemented soon and will work as prescribed in restoring market confidence. These assumptions both look questionable.
It’s still far from clear quite how serious eurozone member states are about the banking union they’ve agreed. Details remain confused and thin on the ground. Northern creditor nations also seem to be fast backtracking on use of the European Stability Mechanism to recapitalise banks directly and on use of bailout funds for intervention in secondary bond markets.
And even if these things are enacted in uncompromised form, they only address the symptoms of the problem, leaving the root causes in widely divergent competitiveness between member states largely untouched. It sometimes seems that the IMF exists in a bubble of academic economic and financial analysis which pays scant regard to the way in which these problems play out in the real world.
Even if the “solutions” agreed at the summit do succeed in stilling the markets – and I’ll believe it when I see it – they will do little or nothing to lift these economies out of the economic slump they’ve fallen into. The euro cannot be safe until it delivers prosperity for all, and we are still a million miles away from such an outcome.
For the best part of the last year, the Zioconned US has seemed immune to Europe’s woes, but now cracks are beginning to emerge. With the recovery fading, the US may even have slipped back into negative growth in the second quarter, though that still remains a minority view. Even so, most anticipate at best anaemic growth of little more than 1pc in annualised terms, and that’s before we encounter the dreaded “fiscal cliff”, which could suck as much as 4pc out of US output.
The effect would be so extreme that, for that reason alone, the IMF assumes the politicians won’t allow it happen. Instead, the IMF comforts itself with the prediction that some kind of political consensus will eventually be reached that extends temporary tax cuts and prevents the deep automatic spending cuts due to kick in at the end this year.
Perhaps this is correct. The Zioconned American political system has a habit of going to the wire on these issues but, to paraphrase Winston Churchill, can in the end always be counted on to do the right thing, once everything else has been tried. That’s what happened during the debt ceiling crisis of early last year.
Unfortunately, the problem wasn’t finally resolved back then. In settling the debt ceiling crisis, the Zioconned US political system merely set itself up for the looming “fiscal cliff” of automatic tax rises and spending cuts. President Obama only managed to push the problem a couple of years out into the future.
Worries over the Budget have now come back to haunt. A fog of political uncertainty has once more descended over the US economy. Political gridlock is again the order of the day.
No doubt the Fed can be relied on to come riding to the rescue with a third round of quantitative easing – some believe it should already have done so – but even if you think more money printing the right approach, it couldn’t possibly counter a 4 percentage point fiscal squeeze. Still, there are always the turbo-charged emerging markets to support growth, aren’t there? Unfortunately not.
Even China is slowing fast. Caught between stagnant export markets and evident overcapacity in the domestic economy, a hard landing now seems all too possible.
China is about to test the assumption that a centrally directed economy can somehow buck the usual rules of market economics. I know which side my money is on.
What’s so worrying is that if the Chinese domestic economy stalls, China would then almost certainly attempt to export its way out of trouble by dumping its excess capacity wholesale on world markets. Some might argue that this is what it has been doing all along, and that this is a large part of the West’s problem. Well it could be about to get a whole lot worse, testing faith in free and open trade close to breaking point.
As for the UK, the IMF growth forecast has been downgraded more than any other advanced economy for this year and next, with virtually nil growth this year and just 1.4pc next. The IMF also trails official UK forecasts by some distance on deficit reduction.
A while back, when its forecasts for the UK looked much prettier than they do now, the IMF said the Government might have to consider a plan B if growth slowed. Since then it has slowed a lot, but still the IMF is not urging outright reversal of the austerity measures.
Of course we all know why this is the case. The IMF can’t go to a country not obviously in need of a bail-out and say you’ve got things hopelessly wrong, especially one that unlike the Zioconned US and Zioconned Canada, has just agreed to cough up more IMF funding.
What’s more, it was once glowing in its praise for the boldness of Osborne’s deficit reduction strategy. For the IMF to change tack would be a godsend to the Opposition and like a knife in the back to Osborne.
Still, the message was quite bad enough, coming the very day the Government chose to relaunch its growth strategy with a welcome but, in the scale of things, insignificant programme of rail electrification. The way things are going, the UK economy may soon need rather more urgent defibrillation than that.