Austerity programs have failed consistently during history yet we are using them as an argument to “fix” our crisis. One may argue that austerity shrinks the economy and therefore debt to GDP is even more difficult to reduce if GDP is falling. This becomes more and more clear as we look at the estimates for public debt of some of the austerity countries. Here are some figures published by CEEMEA in their latest Global Business Outlook:
The idea behind austerity is that reduced budget deficit levels will “instill confidence” into the markets but it seems that by undermining growth and destroying consumer confidence it achieves the exact opposite.
The world’s largest economy, the US, is still spluttering along, the eurozone is trying to avert a sovereign debt crisis and Japan has lapsed back into recession after a devastating natural disaster.
The slowdown in some key developed markets and the tightening of monetary policy in emerging markets has impacted negatively on global trade and industrial production volumes. In a recent study, PwC expects this is evidence of a temporary blip and not a permanent dip – volumes will recover, but with an ever increasing focus on emerging markets as customers and not just producers.
Tensions over currencies have been off the front pages in the first half of 2011, but there is potential for another flare up in the near term, as the underlying causes of the contention have yet to be resolved.
The extent of the economic damage caused by the Japanese earthquake took some time to become apparent. The scale of the disruption caused to the supply chains of manufacturing firms was larger than expected (particularly in the automotive sector), which plunged the economy back into recession in the first quarter of 2011.
The US economy has also experienced a slowdown in recent months, with the economy expanding well below trend in Q1 2011, and there has been soft data emerging from the US labour and housing markets and the manufacturing sector since the start of the year.
The main body of the reconstruction phase of the response to the recent Japanese earthquake will help boost world GDP growth to 3.6% in 2012. The general upswing in growth in 2012 is expected to be driven by improved growth performance in some of the G7 economies such as Japan, US, UK, and the Central and Eastern European countries like Russia and Poland. These countries are expected to be boosted by increased global trade, recovering consumer spending and lower levels of uncertainty surrounding global economic prospects.
You can see the full Global Economy Brief report here.
Key recent changes to the EIU’s world economic forecast include: Japan growth cut to 1.4% this year; higher average oil prices; raise in US growth forecast for 2012; slight raise to GDP growth forecasts for the eurozone and reduced level of US dollar appreciation against the euro.
I wonder if this is not rather an optimistic figure. I’m mainly thinking of Japan. They’ve had four unprecedentedly large disasters lately: an earthquake, tsunami, partial power outage, and the nuclear power plant accident, which is the most serious problem at the moment. But this is not all. You can see national health issues rising up, the contaminated food will cause a major drop-off in local agriculture businesses and the damage from the earthquake on the capital stock remains to be seen.
The events seem to turn into a massive leakage of radiation and, unfortunately, to contamination of a meaningful portion of the food supply. Consequently, agriculture in the northeast of Japan is expected to be seriously affected. In such a scenario, distribution channels would be disrupted and Japan’s food imports would go up. On the other hand, industrial production and exports are expected to go down which means that the trade balance could easily fall into deficit. I would expect Japan to be partially recovered by the end of the year if no other major disaster is coming but I still think the economic forecasts I’ve seen so far are too optimistic.
The rest of EIU’s forecasts are common sense considering today’s political agenda.
McKinsey Global Survey Results show that, overall, thinking about financial and other effects of the crisis and their companies’ current position, just over 2/3 of respondents expect their companies to emerge from the crisis stronger. However, when that will happen is much less clear; while executives indicate that the economy as a whole is healthier now than it has been in some time, they don’t expect much further improvement soon.
A comparative analysis shows that respondents’ views on a range of trends affecting businesses and the economy are slightly more optimistic overall than they were in June, and notably more optimistic than they were in March. Similarly, the share of executives saying that their nations’ economies are better off now compared with last September is notably larger than it was six weeks ago. But the share expecting improvement in economic conditions by the end of 2009 has barely changed and more than twice as many executives still expect their nations’ GDPs to fall in 2009 as to rise.
Although 37% of the respondents do expect economic conditions to be better at the end of this year than they are now, conditions are so poor that only 20% of all respondents expect an actual economic upturn in 2009, a fall of 8% points in six weeks. Even when stock markets are booming, it seems, executives think there’s still a long way to go.