Now that we are enjoying the party – or at least falling interest rates and lower taxes – it is reasonable to ask what the hangover will be like. This is particularly true on a day when Britain cut interest rates from 3% to 2%, the European Central Bank reduced rates from 3.25% to 2.5% and Sweden’s Riksbank cut rates from 3.75% to 2%.
Alex Patelis, the head of international economics at Merrill Lynch, identifies three potential after effects: depreciating currencies, higher government bond yields and rising inflation. Although inflation is not seen as an imminent threat it could surface in a year or two.
Emerging limits and side effects of stimulus packages is only one of five themes Merrill identifies for the year ahead. The other four are:
* Global economic rebalancing. Western nations will need to consume less while developing countries will consume more. Conversely westerners will need to save more and those from developing countries will save less.
* Developing countries generally outperforming the developed ones.
* Continuing monetary and fiscal easing.
* Economic growth is likely to rebound in the second half of 2009 and then peter out.