| Interest wanes in rising taxes |
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| Deficit-spooked states undermine their central banks |
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| David Shapiro: A commentator on one of the foreign business channels aptly described the current state of the global economy: "We can see the light at the end of the tunnel," he explained, "but remember we're still in the tunnel." |
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| It's been over three years since a steady rise in US interest rates pricked the sub-prime housing bubble sparking a crisis that ravaged everyone's savings from municipalities in Australia to pensioners in Scandinavia. And despite their best efforts, governments and central bankers around the world are still battling to clear a path out of the muddle. |
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| Initially economists believed the problem was confined to a small segment of the US economy and that, at worst, it would reduce growth by no more than a quarter of a percent. But after two sizeable hedge funds failed back in early 2007, analysts realised that waves of highly complex investment products, offering exposure to this hazardous area of the American property market, had spread to foreign shores and that the troubles distressing the US banking sector were far broader that originally imagined. |
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| When one of the world's largest investment banks, Lehman Brothers, collapsed nearly two years ago, governments were compelled to intervene, introducing rescue and stimulus packages designed to prevent a total disintegration of the global financial order. Interest rates were cut to near zero and all forms of fiscal discipline were abandoned in an attempt to calm the waters. |
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| The measures seemed to work and sanity slowly returned to the money markets. Businesses began rebuilding their stock levels, equity prices clawed back portions of their heavy losses and, technically anyway, the global economy slithered out of recession. The scorecard was lopsided with fast-developing emerging nations like China, India and Brazil far outpacing developed economies led by the US and the European Union. |
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| Nevertheless all the major producing countries claimed success beating the slump. |
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| But last week, global markets went into a mini-panic after Ben Bernanke, the chairman of the US Federal Reserve, admitted that the American economy was weaker than he had hoped. Bernanke's anxiety was shared by the governors of the Bank of England and the European Central Bank who expressed similar worries about their respective economies, all three choosing to keep interest rates unchanged at historically low levels. |
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| The central bank chiefs only confirmed what markets were telling us. Even with global corporates flush with cash and reporting earnings that were ahead of consensus forecasts, investors were shunning risky assets and seeking the sanctuary of US treasuries and German bunds. Equity prices were stammering while long-term interest rates were sliding, demonstrating, among other things, that inflation was hardly a bother - well, at least in the medium term. |
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| It's probably too early to draw definitive conclusions about the future course of the global economy but the spate of bad data has sent traders scurrying for their worry beads. The US economy is not creating enough jobs to match population growth and with householders still repairing their balance sheets, consumers are showing constraint in the malls. And even if they display the zeal to splash out, access to credit remains tight. Although businesses are in better shape, executives are nervous about expanding their operations and touchy about hiring extra staff. |
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| Thanks to a surge in German exports, primarily to emerging markets, the euro zone is developing faster than the US. But don't be fooled by the short-term numbers. Greece, Spain and certain other EU members that rely on German and French consumer demand are languishing. |
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| Overall, world economies are inextricably linked and while domestic consumption or a weak currency in certain countries might support a pillar or two of growth, a slowdown, say, in the US, Europe or China will eventually weigh on output. |
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| It's difficult to invest against all this uncertainty for no other reason than a divergence in views between the central bankers and those in charge of government fiscal policy. |
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| It's apparent that while central bankers press to leave interest rates low in an effort to stir demand, governments are being urged to introduce austerity measures and raise taxes to cover ballooning deficits. Until the two parties think in harmony, households and businesses will observe events from the touchline, loath to take on any fresh risk. |