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The Economics Story: … Global Perspectives

Insight on the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.

See: www.strategiceconomics.co.uk

 

Last time, we discussed the near term recovery prospects for Dorset’s economy.  Now, we add an international perspective on trends and risks.

The consensus is for a continued recovery in the world economy over the next two years.

In North America, most forecasters are reasonably bullish, suggesting household finances and business returns will steadily improve.  There are risks in the adjustment away from extreme monetary accommodation but the underlying positive trends of technological innovation are expected to keep the US economy moving forward.

In Europe, the economies are very unbalanced but some forward progress is occurring.  The “core” countries around Germany continue to do much better than the “periphery”, where competitiveness adjustments are still needed.  Accordingly, the ECB is still prepared to underpin demand.  The UK has issues about sustainability (see The Economics Story: … Constrained Real Growth), particularly with regard to the dependence on consumption and housing.  But, as in America, the fundamentals are positive.

In Japan, recent growth has been stronger but the long-term effects of the policy mix remain uncertain.  The prime minister’s reform package has some way to go and the central bank remains loose.  Territorial disputes with China are unhelpful and, generally, the state of activity on the Asian mainland is an important risk factor.  China’s economy is slowing as rebalancing and liberalisation occurs.  Many other emerging markets, across Latin America, Africa and south Asia are vulnerable to a potential Chinese slowdown.

Clearly, there are downside risks. 

First, as hinted above, a recession in China, involving a debt/shadow banking correction and an end to the long investment and construction ‘boom’, would hurt many markets.

Second, a deteriorating Ukrainian crises would have disastrous ramifications for financial and energy markets, especially in Europe.

Third, there is still potential for a renewed ‘credit crunch’ in the Eurozone: the structural adjustment of southern Europe’s debts is far from complete.  Globally, the rebalancing of global funds flow precarious.

Fourth, in many developed countries, the adjustment to ‘normal’ money supply conditions will be difficult.  Mismanagement could lead to an inflation problem and higher than expected interest rates that dampen prospects in America and Europe.  

Fifth, issues about the distribution of earnings, employment and technical innovation could become disruptive.

There are upside risks too.  An investment and technologically led boost to productivity growth could surprise us: rebalancing and policy adjustments could yet prove beneficial to international development.

Significant risks remain but the world economy is in better shape than it was.  Cautious optimism offers better prospects for Dorset’s export businesses.

Professor Nigel Jump, 19th May 2014

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