Champagne still on ice
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The Organisation for Economic Cooperation and Development (OECD) has announced substantial upgrades for its global growth projections—but the party hats are still in storage.
Although the economies of its 30 member countries are now anticipated to grow by 1.9% next year, revised up from 0.7%, economists were quick to talk up the downside risks still looming for developed markets.
One influential voice on the subject is Paul Krugman, the Nobel prize-winning economist and New York Times columnist. In a blog written the day before the OECD report was released, Krugman warns that the loss of trust of the American public in government policy towards the banks has “greatly increased the chance of a Japanese-style lost decade”.
His concerns are echoed in the report itself. In its opening editorial Jørgen Elmeskov, acting head of the economics department at the OECD, warns that “Japan’s experience has shown that it is more difficult to exit than to enter deflation and that deflation makes it much harder for policy to respond to adverse shocks”.
Both men suggest that the next stage of the recovery is reliant on consumers and their continuing faith in government policy.
What both men suggest is that the next stage of the recovery is reliant on consumers and their continuing faith in the success of government policy.
More broadly both have argued that a sustainable recovery will rely on the correction of international trade imbalances. In particular China’s currency peg against the dollar has become a major source of worry for Barack Obama, the American president, and his administration.
Elmeskov says while the crisis caused a narrowing of these imbalances this appears now to have “run its course” and they remain at “levels that would have been unprecedented just a few years ago”. While this was tentatively drawn attention to during Obama’s recent visit to China, progress on the problem remains elusive and mired in wider political debates between the two countries.
As the largest foreign holder of American government debt, China undoubtedly has an interest in a strong dollar. More importantly, however, it has also given Asia’s second largest economy a huge stake betting on the America’s long-term economic strength which can only be guaranteed by weaning it off credit.
Tomas Hirst is a Senior staff writer on Fund Strategy
