Weaker than it looks
Growth is healthy in America and Britain. But most of the world economy is in trouble
FOR the American and British economies it has been a long road out of the woods, but the journey is nearing its end. America's unemployment rate fell below 6% in September. Britain's economy, where output was up 3.2% in the year to June, is growing faster than any other big rich country's. Central bankers are counting the days until they can raise interest rates.
Virtually everywhere else, however, the news is grim and getting grimmer. The euro zone, the world's second-biggest economic area, seems to be falling from a feeble recovery back into outright recession as Germany hits the skids. Shockingly weak industrial production and export figures mean Germany's GDP is likely to shrink for the second consecutive quarter—a popular definition of recession. Japan, the world's third-biggest economy, may also be on the edge of a downturn, because April's rise in the consumption tax is hurting spending more than expected. Russia's and Brazil's economies are stagnant, at best. Even in China, still growing at a suspiciously smooth 7.5% a year, there are worries about a property bust, a credit bubble and a fall in productivity.
Such a lopsided world economy is unlikely to be stable. Either the weakness outside the Anglo-Saxon world proves temporary, or it will spook financial markets and darken the outlook everywhere. The conventional view is that global growth will strengthen in 2015 as America's surge buoys other places, and as the recent weakness elsewhere proves temporary. The IMF reckons global growth will rise to 3.8% next year. This newspaper, however, is more worried on two counts. First, today's weakness, especially in the euro area, could last longer than investors expect; and second, the lopsided growth could itself fuel destabilising shifts, particularly in the dollar.
The euro area is in a far bigger mess than the headline figures suggest because its growth has long been flattered by Germany. Italy has been in recession for two years; France's economy has been stagnant for months. Now that Germany is in trouble, the chances of a Japan-style deflationary spiral have risen sharply. German policymakers remain pigheadedly opposed to the stimulus the euro area needs. Even as their own economy has stalled, they are determined to balance the budget in 2015. They want to force France to cut its deficit, they show little interest in a euro-wide investment scheme, and their opposition explains why the ECB is going so slowly with a bond-buying scheme to address deflation. The quantitative easing that markets expect is months off, if it happens at all.
The euro zone's prospects are grimmest, but other weaklings are also a long way off recovery. In Japan, for instance, the economy is due to get clobbered by another rise in the consumption tax in October 2015. And with commodity prices falling and China slowing, it is hard to see how other emerging economies will accelerate, even if America is growing.
Optimists see the stronger dollar as a simple means to export America's recovery elsewhere; but that too is more complicated than it first looks. The greenback is certainly on the rise, fuelled by faster growth and the prospects of tighter monetary policy from the Fed. On a trade-weighted basis, it is up 6.3% since July, and is at a six-year high against the yen and two-year high against the euro.It looks likely to go higher: dollar surges tend to stretch over several years.
This should be good news for the weaklings: their exporters will get more competitive, while pricier imports will ward off deflation. But it could also bring risks. Currencies have a tendency to overshoot. Firms and governments that have borrowed in dollars in recent years will have to pay more. Dollar borrowing by emerging-market firms has risen dramatically since 2008, to an estimated 70% of total bond issuance. And the temporary boost from a cheaper currency could provide the likes of France, Italy and Brazil (and increasingly Germany) yet another excuse to put off structural reform.
The prescription for the weaklings is simple: heal thyself. Rather than waiting for America to solve their problems, the laggards should treat the recent spate of bad news as a wake-up call. The ECB should start bond-buying forthwith. The Japanese government should delay the rise in the consumption tax until the economy recovers. Countries that can afford it, notably Germany, should invest in infrastructure. And even America and Britain should be wary, especially over tightening monetary policy too quickly. There is a lot that can go wrong—and they don't want to be dragged back into those woods again.