A few recent developments justify greater hope: 1) stronger
manufacturing figures; 2) signs of housing market stability; 3) healthier
results from major international banks; and 4) better GDP figures in China, the
US and the eurozone.
Since precipitous manufacturing declines drove a dangerous collapse in world
trade late last year, recent improvements are positive, even though the sector
still shows big year-on-year falls. House prices are stabilising and have
started edging up. US house prices have seen their first monthly increase in
nearly three years, thus alleviating one of the major causes of the financial
The banks are still weak. But unprecedented public support and policy
stimulus are now producing desired results. In spite of understandable anti-bank
populism, it is good that banks are now starting to generate profits. But the
hasty return to the discredited bonus culture is worrying.
Not everything is rosy. China’s robust growth will be difficult to sustain
unless it reduces its undue reliance on exports. The need to rebalance the
economy away from exports and towards domestic demand applies equally to Germany
and Japan. The US cannot be the world’s consumer and importer of last resort.
Deficit countries such as the US and the UK must consume less and export
more. If all the major players hope to rely on export-led growth, we will soon
face a new crisis.
The US unemployment rate, now 9.4%, could rise above 10%. In the UK, the jobless
total could increase above three million next year.
If recovery starts, the massive fiscal and monetary stimulus will have to be
withdrawn. Interest rates will have to increase to more normal levels. But the
timing and scale are critical. If withdrawal occurs too early, or is too abrupt,
the economy would sink again into recession. If the stimulus is maintained too
long, it could unleash an inflationary surge. Policymakers face hard choices.
But in the short term, the risks of a relapse are much bigger than the dangers
of higher inflation.
David Kern of Kern Consulting is economic adviser to the British Chambers
of Commerce. He was formerly NatWest Group chief economist.