Global economy hovering between growth and stagnation

http://www.theguardian.com/business/2014/nov/17/global-economy-hovering-between-growth-stagnation

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UK trade to the EU

Ambitious plans for Britain to export its way out of trouble have foundered. The message from David Cameron was that Britain, which exports a third of its output, can expect to see little improvement in the next few years. In fact things might get much worse.

Fostering an export boom was a central plank of government policy following the banking crash, when a fall in the value of the pound was supposed to further help booming demand for British goods in all parts of the world. Sterling did indeed drop by a quarter, but Britain’s trade deficit with the EU has become increasingly negative. We are importing more and exporting less.

For a time an improvement in exports to south America, China and the emerging economies of Asia made up for some of the worsening figures from Europe. That came to an end earlier this year as several emerging economies began to falter.

Eurozone GDP

Gridlock in Brussels has prevented Europe’s largest nations from firing up their economies to boost growth and leave the crisis behind. Germany, France and Italy were quick to recover from the banking crash of 2008, but have struggled to gain any momentum. A sovereign debt crisis in Greece in 2010 that spread to Spain in 2012 undermined the recovery in the region’s banking sector.

The word economist’s increasingly use to describe the situation is stagnation. This year has been marked by increasingly strident debates over how much the European Central Bank (ECB) should join the Bank of England, US Federal Reserve and Japan’s central bank in pumping trillions of euros into the financial system to reduce the cost of credit and spur lending.

Germany wants the ECB to keep its powder dry, claiming cheap credit will lead to rampant inflation. Critics say that without an injection of funds, business confidence will wane further as inflation falls below zero and unemployment rises again.

Eurozone unemployment and inflation

The high jobless count has proved difficult to bring down in France and Italy. François Hollande’s Socialist administration has sought to bring the unemployment rate below 10%, only to see it stay in double digits and hit a record of 3.43m.

In Italy, the broad jobless rate is 12.5%, just above the eurozone average, but officials in Rome are wrestling with a youth unemployment rate of 44%. The country’s prime minister, Matteo Renzi, promised his “Jobs Act” would kickstart Italy’s economy and attract foreign investors, but Brussels has frowned on his spending proposals and unions are upset that he wants to make it easier for companies to fire people.

Fearful of the future, eurozone consumers have stayed away from the shops, and with the situation still fragile businesses have delayed investment. One effect has been to drive the inflation rate down close to zero. Prices rose a little last month, but not enough to indicate that consumer demand has returned.

China’s GDP

The extent to which China’s booming economy has been propping up the rest of the region, plus Brazil, Russia and Germany has become obvious in the last year. Beijing exported work and jobs as manufacturing became increasingly interconnected. It imported huge amounts of energy from Russia and food from Brazil, and machine tools and cars from Germany.

To overcome weak demand from Europe and elsewhere, the Chinese authorities allowed state enterprises to borrow vast sums for investment spending. To head off a debt-fuelled crash, Beijing has restricted the flow of credit, so much so that the official growth rate of 7.1% could translate to more like five to 5.5% in reality. Many economists believe this would not be enough to keep the growing population in work.

Japan’s GDP

Japan appeared to recover from the 2011 tsunami under the guiding hand of the country’s prime minister, Shinzo Abe. His “three arrows” of reform – higher government spending, cheaper credit and shaking up old-fashioned business practices – appeared to be working. Government spending put more money in people’s pockets and they spent rather than saved. This pushed up inflation above zero.

Cheap credit also helped and discouraged saving, weakening the currency. Reforms, however, have proved more problematic and an ill-timed rise in VAT earlier this year discouraged spending. Now Tokyo is staring at a decline in growth. To reboot his policies, Abe is considering calling a snap election.

Oil price

Oil prices have proved a reliable bellwether for the health of the world economy. Since dropping below $50 a barrel after the financial crash, it has mostly stayed above $100. This illustrated the strength of the global recovery, but in the summer Brent crude prices reacted to the fall in China’s growth and slowing growth elsewhere. On Monday it fetched less than $79.

The US would in times past have picked up the slack in demand. The world’s biggest economy is growing at between 2% and 3% a year and demand for energy is picking up. The difference with just a few years ago, however, is that the US is edging closer to self-sufficiency in oil and gas. Such is the shale gas, or fracking, revolution that there are concerns Washington is in league with Saudi Arabia to drive down the price for the purpose of bringing Russia and Iran to heel.