The global economy is on the verge of a reverse. Globalisation could be too. The response of policymakers will require leadership of the highest quality, which thinks of inter-generational impact in an era when the pressures of short-term political calculation and expediency have never been higher.
In the Eurozone yesterday, Mario Draghi, the president of the Central Bank, astonished markets by signalling he may cut interest rates and expand quantitative easing to address the risk of a renewed slump.
Their “discount rate” is already negative, at -0.2%, meaning banks effectively have to pay the ECB for holding their cash. While Ireland and Spain offer some hope, the ice Europe skates on is thin.
Meanwhile if the US economy was going to be the saviour of global growth, rates would be rising already and they are not. Consumer, housing and auto are all strong but the rest of the economy is dragged by energy, emerging market trade and manufacturing which is weak almost everywhere you look.
Asia wont supply the growth, Japan remains flat, and China will not repeat its credit and investment mistakes of 2010 and is trying to steer a much steadier course through its own correction.
Meanwhile in the UK real incomes are ticking up for the first time in a long time, as is productivity (very good). But manufacturing is in technical recession, public finances will drag on growth and while lower energy prices boost growth the sector itself is shedding thousands of jobs in what has been a north-east powerhouse.
With a tentative recovery facing into global weakness the decision of the Conservative government to step up its fiscal tightening is a major gambit. Tax credits encourage the very thing the public finances and economy need, which is families working to earn. Deciding to cut them is therefore, at best, curious timing.
In truth the UK’s deficit is driven by the weakness of its regional economic performance outside of the south east. Fix that and you fix the deficit. The Chancellor’s Northern Powerhouse agenda is a positive response worth backing, but the substance behind it has yet to become fully clear.
In Scotland, the economy’s relatively greater dependence on the energy and public sectors has traditionally given it shallower cycles but should see it outpaced by the average for the country in the current swing. The scope of policymakers to do much about it is limited, but growing. And the pressure from the left for them to prioritise distribution over competitiveness is a major policy conundrum, the answering of which will determine the course of the next decade.
Next week’s highlights
UK Economic Announcements: 27: GDP (Preliminary) 30: Consumer Confidence
International Economic Announcements: 27: Consumer Confidence (US) 28: Crude Oil Inventories (US) 28: FOMC Interest Rate (US) 29: Business Climate Indicator (EU) 29: Economic Sentiment Indicator (EU) 29: Initial Jobless Claims (US) 30: Unemployment Rate (EU)