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The slowdown is spreading around the world
Sep 1st 2012 | from the print edition
NOT for the first time, the recent behaviour of financial markets has been at
odds with economic fundamentals. The living has been easy on American and
European stock exchanges this summer, despite plenty of gloomy data. Investors
may have been placing too much faith in the capacity of central banks to
counteract economic weakness.
The global economy expanded by just 2.8% in the year to the second quarter,
according to The Economist s measure of world GDP (see chart). That is the
slowest rate since the end of 2009, when recovery from savage recession in the
wake of the financial crisis was getting under way. The most perturbing aspect
of the current slowdown is that the weakness is so widespread, affecting
emerging economies as well as rich countries.
The most fragile economy in the rich world is that of the troubled euro area,
where GDP shrank by 0.2% (an annualised decline of 0.7%) in the second quarter,
leaving it 0.4% smaller than a year earlier. Beset by fears about a possible
Greek exit and a bigger bail-out for Spain (which this week received a rescue
request of its own, from Catalonia s regional government), the euro zone is
sliding ever deeper into the mire. A composite index of output in manufacturing
and services from Markit, a research firm, based on purchasing-manager reports
in July and August, is pointing to a further fall in GDP in the third quarter.
The big bright spot within the 17-country area has been Germany s continuing
strength. Its economy, which makes up over a quarter of the euro zone s output,
expanded by 0.3% in the second quarter, leaving it 1% bigger than a year
earlier. But the German light is dimming, too. A business-climate survey
conducted by Munich s Ifo Institute for Economic Research found expectations
for the next six months at their lowest since mid-2009.
The euro zone s troubles are hurting other rich countries. Bolstered by
reconstruction work following the catastrophic earthquake and tsunami of March
2011, the Japanese economy grew by 3.5% in the year to the second quarter. But
the value of exports to the European Union fell by a startling 25% in the year
to July. On August 28th the government highlighted the risk to recovery from a
further slowdown in overseas economies.
America has been doing a lot better than Europe. In the second quarter its GDP
grew at an annualised rate of 1.7%, according to revised figures published on
August 29th. But the recovery has been slowing: growth is down from 2% in the
first quarter and 4.1% in late 2011. Although there are signs that the housing
market is at last coming up for air home prices rose by 1.2% in the year to the
second quarter consumer confidence fell sharply in August.
Making matters worse, the slowdown is also affecting emerging economies. Among
the four BRIC countries (Brazil, Russia, India and China), Brazil s fall from
grace has been particularly marked: its growth in early 2012 was anaemic. A
wider slowdown in Latin America is under way as Chinese demand for commodities
from the region slackens.
Flagging imports suggest that China s slowdown will prove to be more severe
than previously expected. The country s exporters are also having a hard time.
In August new export orders for manufacturers were at their weakest since March
2009, according to Markit. Chinese GDP grew by 7.6% in the year to the second
quarter, its slowest rate since the financial crisis. Industrial production
grew by only 9.2% in the year to July, well down on the 14% rate a year ago.
The Shanghai stockmarket, which has plumbed a three-year low, reflects this
sense of weakness.
In contrast, rich-country stockmarkets have been buoyant over the summer.
During the past month American equity prices rose by 4%; European stockmarkets
were even more sunkissed, gaining an impressive 6%. The rallies are now
petering out, perhaps because investors are becoming more realistic about what
central banks can truly deliver.
On August 31st Ben Bernanke, chairman of America s Federal Reserve, was
expected to offer some clues about the direction of the country s monetary
policy at an annual pow-wow for central bankers in Jackson Hole, Wyoming. Even
if he were to hint at a third bout of quantitative easing, another round of QE
seems likely to have less impact on American growth than the previous two.
This way to the hard landing
One central banker who won t be in Jackson Hole is Mario Draghi, president of
the European Central Bank (ECB). He cancelled his trip because of his workload
ahead of a crucial meeting of the bank s council on September 6th. Markets are
eagerly awaiting what he has to say after that meeting. The single most
important reason why they regained their vim over the summer was Mr Draghi s
pledge on July 26th that the ECB was ready to do whatever it takes to save
the euro. Mr Draghi has laid out a framework for renewed purchases of
government bonds, but a host of crucial details remain to be resolved. Even if
he can present a proper plan in early September, which some doubt, investors
may be disappointed at what emerges not least because Jens Weidmann, head of
the influential German Bundesbank, has stepped up his opposition to bond
purchases.
The disappointing rich-world recovery following the financial crisis has shown
that central banks cannot by themselves reboot debt-burdened economies. The
endless euro saga has demonstrated that a lasting solution to debt crises
requires bold political action. Financial markets forgot those lessons over the
summer; they may soon have to relearn them.
from the print edition | Finance and economics