Come spring - time for the new green sprouts (of course, for the inhabitants of the southern hemisphere, this metaphor makes no sense). Everywhere there are "the first shoots of economic recovery. In the U.S., increased consumer confidence, and improved indicators of industrial production. In the UK, consumer confidence reached the highest values for this year (although the study was conducted before Alistair Darling unveiled his budget, which is the subject of harsh criticism). Japan and North Korea have published information on the increase of industrial production for the first time in several months.
Especially good things from China, where rapidly rising public expenditure on infrastructure development and accelerating the growth of bank lending. At the same time, the stock market rushed forward, as well as showing signs of completion of a credit drought. But then why the heart becomes so anxiously at the thought of the future world economy? Eventually, interest rates are lowered, the Government encouraged (or forced) banks to issue credit, and fiscal policy are all generous. Given the vast number of existing policy incentives, we certainly have all the conditions for sustained recovery of world economic activity. Although the dynamics of the current economic crisis is very different from all previous ones. Typically, before sustainable recovery has been driven by the fact that politicians had been able to "withdraw" the economy and restore it to health. In 1991, the United States occurred in the recession, but Federal Reserve continued to lower interest rates throughout 1992, other (mild) recession occurred in 2001, but despite the recovery in 2002, the Fed has insisted on reducing the rates of up Until 2003, however, the current recession much deeper. Over the last couple of quarters we have witnessed the most dizzying drop in gross domestic product (GDP) for the entire post-war American history. But the key rate the U.S. central bank is already close to zero. It turns out, the Fed has already exhausted all traditional means of monetary policy: it has nothing more to offer in terms of short-term interest rates.
Britain is in a similar situation. I think that is not yet exhausted all possibilities of fiscal policy, but the government already took incredible amounts of money that will burden future taxpayers. In part, this is the legacy of previous excesses. In particular, in the early decades of the Government of the United States and Britain preferred to gain credits, while the more sensible approach would save something for a rainy (or crisis) day. Now that budget deficits have reached 12% -13% of GDP, it is difficult to imagine what additional assistance we expect from fiscal policy. Unless the economy starts to recover soon, governments will soon have to raise taxes and reduce government spending. Then we will have recourse only to the so-called non-traditional politicians, the most important of which - it is the quantitative easing. However, in reality it might not be so effective as written in textbooks. Quantitative easing usually involves the creation of money, which are then used to buy government and corporate bonds. The idea is that due to the presence of such a large number of extra money in the system to reduce the cost of borrowing for households and organizations through the introduction of money into the economy without the aid of banks in distress.
While the quantitative easing also reduces the cost of borrowing for the government. The temptation of politicians to take new loans is so great that all the advantages of independent central banks are under the cat's tail. In financial markets, there is concern, which is reflected in a high-yield bonds or currency crisis. In any case, the possibility to restore the economic equilibrium of the ship to run out surprisingly quickly. And perseverance with which central banks offer to use "unconventional" measures, gives a sense of society that simply ran out of good ideas. Imagine a doctor who said that the hospital ran out of traditional medicine, and now will be used for the treatment of grass: it is better than nothing, but it unlikely to improve confidence.
The only and biggest problem is how deeply the global economy has already collapsed. Part of the fall - this is a short-term phenomenon resulting from the desperate attempts by companies to reduce production in order to get rid of unwanted stocks. Are already visible signs that this aspect of the economic downturn is coming to an end. However, even if in the coming months, production recovery, the level of demand in the global economy will still be below all expectations, tsarivshih just a few months ago. One option would be to use the so-called gap between potential and actual growth of the economy, which indicate the degree of deviation from the long-term demand growth. Gaps between the potential and real growth play for the economy as a whole the same role as a means of capacity utilization - for production.
Gaps between the potential and real economic growth can not be estimated with absolute precision. However, they do provide information about the possible scale of the economic problems. In March, the Organization for Economic Cooperation and Development (OECD) has published a number of interim economic forecasts, which among others include the assessment of the gaps between potential and real economic growth in developed countries around the world. Figures strikingly high. It is estimated that in 2010 the production in OECD countries as a whole will be 8.5% below the long-term prospects. Yet ever since the postwar period was not such a shortage of demand. This may lead to the following consequences. First, even if indeed the first signs of improvement, companies will be very difficult to make a profit.
The level of activity is much lower than the company had planned in recent years, so their profits are very low relative costs. Secondly, the desire for profit will compel the company to further reduce costs, including lower wages, and job cuts. And thirdly, in terms of low inflation in the world consistently low level of demand can easily lead to deflation. Deflation involves not only the fall in prices, but also the enormous pressure on wages. Under the blow would be grossly indebted households. In the end, a reduction in salary during the period of payment of the mortgage - as a bolt from the blue. Of course, in normal circumstances, central banks can cope with the threat of deflation declining interest rates, but the United States and Great Britain such a measure is no longer available. So, we should do nothing except hope that homeopathy quantitative easing will be effective.
I do not dispute the existence of the first signs of improvement. But their resistance is not yet guaranteed. Activity dropped to very low levels. And from inflation to deflation - a single step. We used all the traditional levers of monetary, and fiscal levers remain slightly. I want to believe that the authorities will have a positive long-term effect. However, at this stage it is too early to say that the patient, the economy recovered from all illnesses.
Especially good things from China, where rapidly rising public expenditure on infrastructure development and accelerating the growth of bank lending. At the same time, the stock market rushed forward, as well as showing signs of completion of a credit drought. But then why the heart becomes so anxiously at the thought of the future world economy? Eventually, interest rates are lowered, the Government encouraged (or forced) banks to issue credit, and fiscal policy are all generous. Given the vast number of existing policy incentives, we certainly have all the conditions for sustained recovery of world economic activity. Although the dynamics of the current economic crisis is very different from all previous ones. Typically, before sustainable recovery has been driven by the fact that politicians had been able to "withdraw" the economy and restore it to health. In 1991, the United States occurred in the recession, but Federal Reserve continued to lower interest rates throughout 1992, other (mild) recession occurred in 2001, but despite the recovery in 2002, the Fed has insisted on reducing the rates of up Until 2003, however, the current recession much deeper. Over the last couple of quarters we have witnessed the most dizzying drop in gross domestic product (GDP) for the entire post-war American history. But the key rate the U.S. central bank is already close to zero. It turns out, the Fed has already exhausted all traditional means of monetary policy: it has nothing more to offer in terms of short-term interest rates.
Britain is in a similar situation. I think that is not yet exhausted all possibilities of fiscal policy, but the government already took incredible amounts of money that will burden future taxpayers. In part, this is the legacy of previous excesses. In particular, in the early decades of the Government of the United States and Britain preferred to gain credits, while the more sensible approach would save something for a rainy (or crisis) day. Now that budget deficits have reached 12% -13% of GDP, it is difficult to imagine what additional assistance we expect from fiscal policy. Unless the economy starts to recover soon, governments will soon have to raise taxes and reduce government spending. Then we will have recourse only to the so-called non-traditional politicians, the most important of which - it is the quantitative easing. However, in reality it might not be so effective as written in textbooks. Quantitative easing usually involves the creation of money, which are then used to buy government and corporate bonds. The idea is that due to the presence of such a large number of extra money in the system to reduce the cost of borrowing for households and organizations through the introduction of money into the economy without the aid of banks in distress.
While the quantitative easing also reduces the cost of borrowing for the government. The temptation of politicians to take new loans is so great that all the advantages of independent central banks are under the cat's tail. In financial markets, there is concern, which is reflected in a high-yield bonds or currency crisis. In any case, the possibility to restore the economic equilibrium of the ship to run out surprisingly quickly. And perseverance with which central banks offer to use "unconventional" measures, gives a sense of society that simply ran out of good ideas. Imagine a doctor who said that the hospital ran out of traditional medicine, and now will be used for the treatment of grass: it is better than nothing, but it unlikely to improve confidence.
The only and biggest problem is how deeply the global economy has already collapsed. Part of the fall - this is a short-term phenomenon resulting from the desperate attempts by companies to reduce production in order to get rid of unwanted stocks. Are already visible signs that this aspect of the economic downturn is coming to an end. However, even if in the coming months, production recovery, the level of demand in the global economy will still be below all expectations, tsarivshih just a few months ago. One option would be to use the so-called gap between potential and actual growth of the economy, which indicate the degree of deviation from the long-term demand growth. Gaps between the potential and real growth play for the economy as a whole the same role as a means of capacity utilization - for production.
Gaps between the potential and real economic growth can not be estimated with absolute precision. However, they do provide information about the possible scale of the economic problems. In March, the Organization for Economic Cooperation and Development (OECD) has published a number of interim economic forecasts, which among others include the assessment of the gaps between potential and real economic growth in developed countries around the world. Figures strikingly high. It is estimated that in 2010 the production in OECD countries as a whole will be 8.5% below the long-term prospects. Yet ever since the postwar period was not such a shortage of demand. This may lead to the following consequences. First, even if indeed the first signs of improvement, companies will be very difficult to make a profit.
The level of activity is much lower than the company had planned in recent years, so their profits are very low relative costs. Secondly, the desire for profit will compel the company to further reduce costs, including lower wages, and job cuts. And thirdly, in terms of low inflation in the world consistently low level of demand can easily lead to deflation. Deflation involves not only the fall in prices, but also the enormous pressure on wages. Under the blow would be grossly indebted households. In the end, a reduction in salary during the period of payment of the mortgage - as a bolt from the blue. Of course, in normal circumstances, central banks can cope with the threat of deflation declining interest rates, but the United States and Great Britain such a measure is no longer available. So, we should do nothing except hope that homeopathy quantitative easing will be effective.
I do not dispute the existence of the first signs of improvement. But their resistance is not yet guaranteed. Activity dropped to very low levels. And from inflation to deflation - a single step. We used all the traditional levers of monetary, and fiscal levers remain slightly. I want to believe that the authorities will have a positive long-term effect. However, at this stage it is too early to say that the patient, the economy recovered from all illnesses.
Stephen King
managing director at HSBC
managing director at HSBC
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