Hamish McRae: America puts a speed limit on global growth

Economic Studies

Click to follow

Is this a normal early-cycle dip or something more sinister? Anyone coming back from holidays this week could be forgiven for wanting to head straight back to the beach. The economic news this past month has been almost unrelentingly dark, contradicting my comment a few weeks ago that in finance it was usually July that was the wicked month, not August. But so far at least no major economy has slipped back into recession and the flow of news from companies large and small has been not too bad. Did we simply have unrealistic expectations for what was always going to be a tough recovery?

As far as the US is concerned the answer to that is surely yes. It continues to grow, but slowly – more slowly than early estimates suggested. As this is, and will remain for another decade or so, the world's largest economy, that puts a speed limit on global growth. Calls for the US authorities to do something to boost growth ignore the scale of the debt legacy left by the previous administration and the previous head of the Federal Reserve. It takes a while to work off debts.

At least one puzzle has been resolved: why was apparently decent growth producing so few new jobs? The answer, we now know, was the growth was massively overstated: the job figures were right; the growth figures were wrong.

The very latest news is not encouraging. Consumer spending is the key to recovery and it will continue to be depressed by the poor housing market – there were some dreadful figures on consumer confidence yesterday – and wealth effect of lower share prices. But looking further ahead, the clouds lift a little. The housing market may be close to a floor and I have not seen any mainstream forecaster suggesting there will be a return to recession. So the issue is whether growth will be fast enough to make inroads into the unemployment total. The probable answer: not for a while yet.

If the US outlook is one of slow recovery, in Europe there is the prospect of something worse. We all knew that the second Greek rescue was a patch, not a solution, and most of us recognised that the so-called stress tests on European banks were a nonsense as they assumed that Greek debt was worth its face value when the markets said it absolutely was not. But even those most sceptical of the whole deal did assume that it would go through. That is now not at all sure. If Finland insists on collateral before stumping up for its bit, that makes the deal look absurd – Greece only gets the money if it gives it straight back. And Germany may not be able to get the deal through its courts. But even if it does go through, Greece will still eventually default, which raises the question as to whether it might actually be better to allow it to do so.

The issue is a common one in finance. A borrower cannot repay. So do you lend more money in the hope that things will turn round or do you pull the plug? There is no simple answer, particularly if the debtor is so important that its failure might have a contagious impact on other debtors. So does Greece pose a systemic risk in the way that Lehman did? It is still being debated but the balance of opinion now seems to be that the authorities made a mistake by not bailing out Lehman, for it probably would have been cheaper to do that than face all the consequences. For Greece? We simply do not know, but maybe there will be no choice, for it may not be politically possible to carry through this second bailout.

Fears about some sort of systemic sovereign failure in Europe have suddenly damaged both commercial and consumer confidence. Yesterday the European Commission revealed that economic confidence in August had shown the sharpest fall since December 2008. The reality has not changed; what has changed is the perception. So the question is whether that change of perception itself will halt the European recovery.

This is an unknown land. Common sense says that it would be ridiculous for one small fringe economy to undermine growth in a trading area as large as Europe. At least one other weak European economy, Ireland, is showing clear signs of recovery. Other larger troubled economies such as Spain are taking credible steps to correct their deficits. Italy yesterday managed to sell some debt at an acceptable rate. Life is continuing. But the "Is Greece the new Lehman?" question will not be resolved for a while yet.

The UK's surprising (comparative) calm

It may not feel like it, but the UK is something of a haven of calm amid all this stuff. Yes, Britons are among the most gloomy in the world about their economic futures, but I personally find that more reassuring than the swagger of five years ago. People are being realistic and responsible. The most recent unemployment figures were discouraging but yesterday's numbers on mortgage approvals were reasonable – a 14-month high, albeit from a very low base. Companies are on balance still paying back debt, which you could say was a bad sign about investment intentions or a good one that they would be ready to run as and when demand lifted.

There is no doubt that the recovery is disappointing and everyone is downgrading their forecasts for this year and next. The consensus is now 1.3 per cent for this year and 2 per cent for 2012. Still, private sector employment over the past year has risen at the fastest rate for 15 years and tax returns are climbing solidly despite the slow posted growth. Goldman Sachs, while trimming its forecast a little, still expects growth at 2.5 per cent next year. If this is a year of two halves, the second should be better than the first.