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The Global Economy No. 6 - September 22, 2011

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The Global Economy No. 6 - September 22, 2011

  1. 1. The Global EconomyMonthly letter from Swedbank’s Economic Research Departmentby Cecilia Hermansson No. 6 • 22 September 2011 A weaker economic outlook makes it even more important to use the right tools from a shrinking toolbox  Renewed economic pessimism and increased debt worries are jeopardising financial and political stability, especially in Europe and the US. Although the risk of a new recession has increased, it still is not part of our main scenario.  Trying to create inflation or raising tariffs are not the right measures to address the crisis, although such ideas are being suggested and in some cases implemented. What are needed instead are more, and more extensive, structural reforms, and for countries that are able, additional stimulus.Gloominess dominates When it comes to the debt crisis drama, the financial market flares up every time the troika ofThe downturn in global stock markets during the the ECB, EU Commission and IMF starts looking atsummer months primarily relates to two the Greek support program to see if reforms arephenomena: renewed economic pessimism and being implemented. Since the Greek economy isgrowing debt concerns. developing weaker than expected and theDespite exaggerated claims and possibly some government has been slow to execute reforms,overly negative analyses, the hard economic data lenders are hesitating whether to approve the nextindicate that a slowdown has already begun after payment, this time of 8 billion euro.the positive rebound in growth following the Make note that sentiment about Ireland is muchfinancial crisis. These data include purchasing more positive and its programme is progressing asmanagers indexes, which have dropped down to a planned, which is evident in the differential betweenreading of 50 in a number of countries, along with German and Irish government bonds, which hasdeclining exports, weaker labour and housing declined recently, in contrast with the correspondingmarkets, and consumption data from the US and German-Greek bonds.Europe. Moreover, GDP growth had already slowedduring the second quarter in the US and Germany. Interest rate differential against the German 10-year government bond, percentage points Export trends, index 100 = 2000m01 22,5 340 320 20,0 Global 300 USA 17,5 280 260 Japan 15,0 Percentage points 240 Euro Zone 220 12,5 Emerging Markets 200 Asia 10,0 180 Greece 160 7,5 140 120 5,0 Ireland Spain 100 Portugal 80 2,5 Italy 0,0 UK France Belgium Sweden -2,5 07 08 09 10 11 Source: Reuters EcoWin Ekonomiska sekretariatet, Swedbank AB (publ), 105 34 Stockholm, tfn 08-5859 1000 E-mail: ek.sekr@swedbank.se www.swedbank.se Ansvarig utgivare: Cecilia Hermansson, 08-5859 7720. Magnus Alvesson, 08-5859 3341, Jörgen Kennemar, 08-5859 7730
  2. 2. The Global Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 6 • 22 September 2011Comments by euro politicians that Greece may consumption had held up better than confidencehave to drop out of the currency union are doing surveys suggest. This is especially true of retaillittle to help the parties involved. Statements by the sales, which have surprised on the upside. In otherGreek government that euro politicians are using words, there is a gap between what households sayGreece as an experiment certainly don’t help, they will do and what they actually do, althougheither, but can be seen as part of the negotiations there is still a possibility that confidence, which is anow under way between lenders and borrowers. leading indicator, is signalling significantly weaker consumption going forward.If forecasters go by what has happened and try toaverage out the negative and positive events, their Considering the gloominess hanging over the USfuture projections naturally will also be negative. economy, our GDP forecasts this year and next are probably too high at around 2%. Even if the USThe problem is that this isn’t especially constructive,since these events, if anything, are binary in the avoids a new recession, it will be hard to create thesense that they can either happen (e.g., the euro growth needed to reach 2%, especially when the labour market, 45 months after employmentcollapses) or not. peaked, still has a long way back and openIt makes more sense to build scenarios on unemployment exceeds 9%.assumptions how the debt crises in the US, Japanand especially Europe will be handled goingforward. If it is assumed that they can in fact be Toolbox: Neither higher inflation norhandled – even at the last minute – the global protectionism will resolve the crisiseconomy should be able to avoid a new recession. When the financial crisis and global recessionIf the crisis cannot be managed, if political and occurred in 2008, the worlds politicians and centralfinancial instability grows at the same time that bank governors worked together to try to fight thefuture confidence declines even further among negative effects. Rate cuts, quantitative easing,investors, companies and households, there is a banking support and fiscal stimulus were among therisk of another recession, and this time it will be tools they used.harder to fight off, and therefore more protracted, At this point interest rates are already as low assince the toolbox at our disposal no longer has as they can be in the US, the UK and Japan, andmany effective tools. relatively low in the euro zone. The time for fiscal stimulus has passed for the euro countries in crisis, US consumer confidence (index) and private consumption (annual % change) but could still work in the US and Germany, if the 140 7 political will can be mustered. 130 6 When the toolbox shrinks, people get nervous, considering that the challenges haven’t gotten any 120 5 smaller. For growth countries, and even some 110 4 developed countries such as Switzerland, there is a 100 3 risk that their currencies could rise enough to hurt them competitively. For Switzerland, this led to the Percent 90 2Index dramatic decision to set a limit on the franc versus 80 1 the euro, which is now being defended with the help 70 0 of stronger confidence and the printing presses. 60 -1 For Brazil, it is more a question of capital controls, but recently of higher customs duties on auto 50 -2 imports as well. There is a risk that other countries 40 -3 will be a little less hesitant to resort to protectionist 30 -4 measures such as higher tariffs when others have 80 85 90 95 00 05 10 already done so, which makes it unfortunate that Source: Reuters EcoWin Brazil has chosen this route. Among developed and highly indebted countries,At the same time it is hard to make projections right there have been suggestions that higher inflationnow based on confidence indicators. For example, could stimulate demand and reduce the debtUS households and businesses were extremely burden in real terms. Professor Kenneth Rogoffworried this past summer when negotiations on the recently said that it was time to “think outside theUS debt ceiling spooked the markets and S&P box”, i.e., that we should no longer be afraid ofdowngraded the US’s credit rating. Still, household slightly higher inflation of 4-6% a year. 2 (3)
  3. 3. The Global Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 6 • 22 September 2011The problem is that you can’t always decide what Structural budget deficit as a share of GDP 2009 and 2012inflation is going to be. For one thing, it could be 4considerably higher, since the previous anchorshave already been dropped. For another, it can be 2harder to pinpoint inflation when the job market is 0weak and so many people are out of work. It’s wage ‐2inflation, if anything, that could have a positive ‐4effect, rather than inflation from higher commodity ‐6prices. 2009 ‐8Furthermore, it is likely that higher inflation would ‐10 2012be followed by higher nominal interest rates, which ‐12reduces the positive impact of such a measure. Nor ‐14would the effect on the debt burden be so positive.The IMF has calculated that if inflation is 5% ‐16annually for five years, the total debt burden wouldshrink by 8-9%. So inflation would probably have tobe in the double digits to have much of an impacton debt. Some of the structural reforms require spending,Questions of income inequality also have to be while others are possible anyway. More efficientconsidered. Wouldnt it be better to raise taxes on government is largely a question of changingthose with relatively high incomes than to raise attitudes. Southern Europe has no other alternativeinflation, which usually hits those with low incomes than to try to improve growth by implementingthe hardest. reforms that make it more competitive, e.g. in education, labour markets, pensions, infrastructure including IT, and public/tax administration.Toolbox (cont.): Structural reforms are vital The time when countries could devaluate their ownIt makes more sense to focus on structural reforms currencies has passed, as has the time when theand more expansive fiscal policy if possible. interest differentials relative to Germany wereMonetary policy is less effective at this juncture, minimal and pricing was inaccurate. If the currencysince many households and businesses are less union is to survive, member-countries have to adoptinterested in borrowing when they are busy trying to more effective economic policies, fiscal coordinationclean up their balance sheets. has to improve, a single bank regulator has to be created, and the ECB, as a central bank, has toStructural reforms are the most important measure eliminate uncertainty about its role as lender of lastfor the PIIGS countries, which have lost competitive resort. Then the currency union would work better,ground in recent years due to their high cost levels even in a crisis. This will take time, but the soonerand often wasteful administration of public the road is staked out, the better.resources. Politicians in Greece, Italy, Spain andPortugal have to convince citizens that it is worth Cecilia Hermanssontheir while to pay taxes, that the money will be usedeffectively and that certain (often wealthy) groupswon’t receive unfair tax breaks and exemptions.Swedbanks Ekonomiska sekretariat105 34 Stockholm Swedbanks Månadsbrev om den Globala Ekonomin ges ut som en service till våra kunder.tfn 08-5859 7740 Vi tror oss ha använt tillforlitliga källor and bearbetningsrutiner vid utarbetandet avek.sekr@swedbank.se analyser, som redovisas in publikationen. Vi kan dock inte garantera analysernas riktighetwww.swedbank.se or fullständighet and kan inte ansvara for eventuell felaktighet or brist in grundmaterialet or bearbetningen därav. Läsarna uppmanas att basera eventuella (investerings-)beslut ävenAnsvarig utgivare på annat underlag. Varken Swedbank or dess anställda or andra medarbetare skall kunnaCecilia Hermansson, 08-5859 7720. göras ansvariga for forlust or skada, direkt or indirekt, på grund av eventuella fel or bristerMagnus Alvesson, 08-5859 3341 som redovisas in Swedbanks Månadsbrev.Jörgen Kennemar, 08-5859 7730 3 (3)

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