Most of the experts and governments agree – more growth would be a good thing.
For the heavily indebted countries, more growth might bring down unemployment and its associated costs. It would also boost revenues. Growth cuts deficits without painful decisions. For the successful surplus generating countries growth means even bigger surpluses, and more market opportunity to export around the world. So why isn’t it happening?
The problem is too many countries cannot afford the stimulus they think growth needs. If you are in a struggling Euroland economy, the debt markets are hounding you. Governments in Italy, Spain, Greece and Portugal cannot get out the cheque book to boost growth, because the bank manager is threatening to cut them off. If you are an over borrowed economy with its own currency, like the US and UK, you have a bit more flexibility. However, warning voices are telling those countries to start to rein in their deficits for fear of market retribution. In the US, Democrats and Republicans have been unable to agree on cutting spending or raising taxes to bring the deficit down. There will anyway be cuts, to try to cure the expensive impulse to borrow more. The UK Autumn Statement tells us that despite all the best intentions the UK future deficit is being revised up. Cutting deficits at times of low growth is not easy.
On the other side of the ledger are the successful exporting economies, Germany, Japan and China. Japan has tried every kind of domestic stimulus and as a result now has high debts. China is coping with inflation, but may soon be in a position to relax a little as price rises come under control. Germany is also worried about inflation, and about the demands made on her by the rest of the eurozone.
In practice running a bigger deficit is no guarantee of more growth. What is needed in the west is a mixture of more domestic demand and stronger banks to finance a private sector response to that demand. In the UK getting inflation down would help a lot, to ease the squeeze on living standards that high inflation has intensified. In both the US and the UK there is plenty of scope to substitute more home production for imports, now both currencies have fallen and made the countries more competitive. The US should fare a bit better than Europe in the months ahead. Europe is heading for very slow growth, with a recession likely in the heavily borrowed countries.
The eurozone still faces its fundamental problems. The Germans are still unwilling to lend, grant or print the money to help the south on a large enough scale. The south is still struggling to make the cuts and cure the deficits. A new Spanish government this week is thrown into the battle. Meanwhile Spanish and Italian bond yields remain above 6.4%, and Belgian bond yields are close to 4.3%. There is a surprising lack of speed in putting together a closer union and sorting out the full remit of the Central Bank. We recommend continuing to avoid European investment.
John Redwood is chairman of Evercore Pan Asset’s investment committee.