Global economy: The global economy fell late last year and early this year like a boxer knocked out by a huge punch. The quantity of global smelling-salt stimulus waved under its nose since is unprecedented.
These extraordinary efforts – from printing money to running double-digit deficits normally seen only in wartime – are having their effect. The global economic boxer has raised a hand off the canvas, and the markets have cheered. But it’s not clear the economy can stand unaided.
Consumer confidence is up in most countries, rising from multi-year lows. Global output is falling less and may be close to stabilising. Purchasing managers surveys – up-to-date indicators of activity – show steady improvement. The UK’s manufacturing PMI rose in May to its best level in a year, but still short of the 50 mark that divides growth from contraction. UK services PMI managed to go positive. In the US, the Institute for Supply Management’s factory index rose to 42.8 in May. Germany's manufacturing PMI rose for a fourth month to 39.6. And China has just recorded a third month over the 50 mark.
But the rise comes from the floor. UK manufacturing output hasn’t stopped contracting yet. In the first quarter, it dropped to 1993 levels. German GDP declined in the first quarter to 2005 levels. It is still contracting.
Moreover, the fiscal deficits of the US and UK are clearly unsustainable for more than a year or two. There is a limit to how much debt can be issued without driving up interest rates. The US may already be testing that limit now. Longer-term bond yields have been pushing up.
The monetary limits also seem near. China and Germany have expressed disquiet with the quantitative easing by which the US and UK central banks are creating money and buying their own government’s bonds. At some point, creditors seem set to suffer from inflation and further devaluation. Thus far, China’s purchases of US Treasuries have remained large and its stock-piling of commodities has bolstered commodity exporters such as Russia, Australia and Canada. But with real levels of demand low, lower prices may be in store for oil and other commodity exporters.
The private sector and consumers must take over from governments and central banks in the stimulus effort. But unemployment is still rising around the world and consumers are reluctant to spend.
Getting the global economy back on its feet may be the work of years rather than months.
