Friday, October 19, 2012

Three key questions for global growth

Here is the Economist’s view:

From anti-austerity protests in Europe to the US presidential campaign, you don't have to look too far for proof that a weak economy tops most people's concerns. The uncertainties holding back growth are widespread, but we think they can be condensed to three questions: whether the latest policies in Europe will help to save the euro; whether lawmakers can steer the US economy away from the "fiscal cliff" that looms in early 2013; and whether China's response to its economic slowdown will succeed. On all three fronts, my team of analysts and I think moderately favourable outcomes are likely. Our latest global outlook explains why economic conditions should improve a bit next year, and why we have raised our forecast for US growth.

I am a lot less optimistic for these reasons:

  • the woes of the EU essentially concern micro issues (notably labour markets and regulatory reform). Macro fiddling will not address those but do involve screwing the bondholders and investors needed to fund reform and transition;
  • it is tempting to reach the same conclusion regarding the U.S.  The case their highlights the dominance of distributional concerns over production concerns. It may be beyond the polity to draw back from distribution driven politics.
  • China is on the road to equilibrium which includes less risk and lower returns. Double digit growth is not on that agenda. That is not a problem but the west cannot expect China (or India) to provide infinite demand at prices the west loves.

I trust the difference between these views is one of timing not fundamentals.

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