Outlook: Early signs of autumn jitters in equity markets

Outlook

NEVER ONES to stick their necks out, economists at the International Monetary Fund, watching the rapid recovery in Asia in the wake of the global financial meltdown a year ago, have concluded that world growth will be higher this year and next than they expected six months ago. In fact, the 1998/99 slowdown has turned out to be the gentlest of the four dips in growth during the past 30 years.

However, the view from these sunlit uplands is clouded. New figures yesterday showed the US trade deficit is yawning ever wider. This reflects the role played by the supersonic American economy in carrying the rest of the world so benignly through the crisis. It also signals the pent- up inflationary pressures from US growth, kept at bay so far by the strength of the dollar.

Unfortunately, the dollar is now on the slide, at least against the yen. A weaker dollar will help correct the trade imbalance, over time, but will also tend to boost inflation. And the corresponding gains in the yen threaten to derail the Japanese recovery, which in turn is needed to keep the rest of Asia growing too. The question facing the world's policymakers, gathering in Washington for this weekend's G7 meeting, is therefore how to achieve a gentle correction in the balance of growth and trade without triggering a currency market over-reaction.

One solution was barred by the Bank of Japan yesterday, with its firm refusal to do what everyone else in the world thinks it ought to, and loosen monetary policy through the good old Keynesian method of pumping cash into the economy. The Japanese government will agree to run a yet bigger budget deficit, but it is close to the limit of how much more it can achieve through fiscal stimulus. This is because any budget deficit judged to be unsustainable will raise long-term interest rates in the bond market thus counteracting the beneficial effects of the stimulus.

That puts the spotlight firmly on Alan Greenspan. Yet again the grand old man of central banker has been cast in the role of economic superman. The chances are he will raise US interest rates further in October. By slowing the economy, higher borrowing costs would help trim import growth. They should also help the dollar, or at least prevent it from falling too sharply.

However, even "Superspan" needs the occasional helping hand. American policymakers have said it time again; to solve the imbalances in the world economy, others must now take up the baton of growth and run with it. The weak euro is clearly aiding European recovery. Japan's central bank chief will have a lot of explaining to do at the weekend if he sticks to his guns. Meanwhile, a repeat showing of the now familiar autumn wobble in world equity markets looks all too possible. We may already be seeing its early signs.

PROMOTED VIDEO
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
News
Lizards, such as Iguanas (pictured), have a unique pattern of tissue growth
science
Extras
indybest
News
Anna Nicole Smith died of an accidental overdose in 2007
people
Life and Style
food + drink
Arts and Entertainment
'The Great British Bake Off' showcases food at its most sumptuous
tvReview: Bread-making skills of the Bake Off hopefuls put to the test
Extras
indybest
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Test Lead (C#, Java, HTML, SQL) Kingston Finance

£40000 - £55000 per annum: Harrington Starr: A Global Financial Service Organi...

Access/Teradata Developer, Banking, Bristol £400pd

£375 - £400 per day: Orgtel: Access / Teradata Developer - Banking - Bristol -...

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home