Global economy: The rescued world has been a Goldilocks one for financial markets. A year of two ultras — low interest rates and high fiscal deficits — and a gathering economic recovery has made the porridge seem just right, as in the falsely good times of Alan Greenspan, the former Federal Reserve chairman. But Goldilocks should be getting nervous.
The Fed’s latest reiteration of its low for long pledge has pushed equity markets up to fresh highs. But the problem for investors is that the Fed medicine is working. The porridge is warming. Maximum gas won’t be warranted much longer. GDP grew at a 5.9 per cent annualised rate in the fourth quarter and inflation is up to 2.6 per cent. The ISM manufacturing index has been growing for seven months, with price rises its strongest sub-component recently. Unless the economy takes a surprising stumble, the Fed rate rise may be a matter of months away.
In China, meanwhile, the porridge is starting to scald. Annual industrial production growth is up by over 20 percent in 2010, exports by 46 per cent in February on the admittedly depressed levels of a year earlier. The inflation rate jumped by more than a point in February. The world is right to want a yuan revaluation, but the Chinese authorities are more likely to turn the heat down with tighter money.
In Europe, however, cold porridge is still the problem. Annualised fourth-quarter growth in the euro zone was a meagre 0.4 per cent, and inflation has slipped to a too low 0.9 per cent. Worse, the fiscal fire has to be damped down. Budget deficit cuts are essential in Greece, Ireland, Spain and Portugal, and advisable everywhere else. The European Central Bank may even try to warm the pot with still looser money.
For investors, the hot-Chinamerica, cold-Europe world has dangers. Global equity markets are up by about two thirds from the lows of a year ago. Metals prices are up 90 per cent. But China and the United States may have to tighten even as the euro zone continues to ail. Less liquidity and less than convincing global growth could mean the bears return to chase Goldilocks away.
