It is not particularly rewarding, being a macro economist when the global marbles really start to roll around. It’s even worse when you’ve just published your detailed, considered study, and the politicians give the wheel of fortune a brisk spin and leave much of your analysis looking pretty irrelevant. Both the IMF and the OECD released their “state of the global economy” reports and found the ground shifting on them dramatically. The IMF’s latest “Global Financial Stability Report” came out in April and the OECD’s Economic Outlook was published on 22 May. The backdrop to both reports is set by a second Greek election which looks odds on to reject German and EU demands for yet more Greek austerity, and growing concerns over the state of Spanish banks.
Yet as both the IMF and the OECD point out, the news is by no means all bad. Recently I posted a blog featuring the economist, John Hussman’s belief that the US is probably already in recession. The OECD takes a very different and much more positive view of the US and the global situation. The OECD’s basic stance is that although it continues to be extremely fragile, the global economy is on the mend, but – as is also clear to the IMF – there are big differentials between Europe and the rest.
“The global economy is, once again, trying to return to growth, helped by a modest pick-up of trade and an improvement in confidence. It is doing so, however, at different speeds, with the US and Japan growing at a stronger pace than the euro area and large emerging economies enjoying a moderate cyclical upswing.”
The OECD expects strengthening private sector demand to push US GDP growth up by 2.4% for 2012 as a whole, while growth across the OECD is set to slow 0.2%, from a growth rate of 1.8% in 2011 to just 1.6% in 2012. Japan, by way of contrast, should see GDP grown of 2% in 2012. In Europe itself the OECD speaks not of growth but of a slight 0.1% contraction for 2012, recovering to 0.9% in 2013.
“large EU-based banks could shrink their combined balance sheet by as much as £2.6 trillion through to the end of 2013, with about one fourth of this representing a decline in lending.”
Left to run its course unhindered, this deleveraging by the banks as they shape up to meet the requirements of Basel III, would be highly likely to provoke an even deeper contraction in eurozone growth. The IMF has a rather foggy sentence which suggests that what it calls “supervisory efforts” could and should come into play to “avoid serious damage to asset prices, credit supply and economic activity in Europe and beyond.” Of course, the IMF knows full well that regulators do not control bank lending directly so what it seems to be suggesting here is that regulators should not push lenders too hard or too fast in the direction of meeting Basel III capital requirements. However, as I noted in an earlier blog, the market is doing the pushing anyway by raising the share price of those banks who are seen as more robust because they have higher capital reserves than their peers – which, of course, rather dashes hopes that banks will increase lending.
The IMF is similarly powerless to do anything about Europe’s political mess.
“European policymakers need to build on recent improvements… Avoiding fresh setbacks will be critical”, it says.
Setbacks do not come much larger than a Greek exit (already dubbed “Greekmaggedon”) from the euro, and there does not seem to be a whole lot that Europe’s policymakers can do about this. The power lies with Greek voters, which many would say is where it belongs, rather than with the political class.
Further reading on bank regulation and deflation:
- Basel III: Uncharted Territory, by Sir Howard Davies
- Banking Transparency and the Robustness of the Banking System, by Solomon Tadesse
- Deleveraging, Deflation, and Rebalancing in the Global Economy, by Paul Brain and Laurie Carroll
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