Blog: No change: global economy still facing uncertainties
Dave Leggett | 22 July 2010
US Federal Reserve chairman Ben Bernanke
US Federal Reserve chairman Ben Bernanke has made some remarks that have scared the markets a little bit, but what he has said isn't all that surprising.
He has told the US Senate Banking Committee that record low interest rates would still be needed to support economic recovery, that the outlook for the US economy is 'unusually uncertain' and that the Fed is prepared to step in with 'further policy actions' to boost the US economy if needed.
It is hardly a surprise. The world economy is still very much in recovery phase and facing imbalances – chiefly in the form of an unprecedented debt hangover and its real-world recessionary consequences. It will take years to put right.
The economic bounce-back – such as it has been - from the depths plummed in 2009 was hugely assisted by fiscal stimulus packages across the world, record low interest rates and an inventory effect (notably strong in the auto industry where the swings in activity have been massaged by scrappage schemes and tax breaks).
But we are now entering a new phase. Unemployment in the US and many parts of Europe is high and economists are concerned that new jobs are not being created in the numbers that they should be at this point in the recovery phase. There is little prospect of certain sectors – like construction – soaking up the excess labour with a rapid return to pre-2009 levels of activity.
Lurking in the background in Europe are persistent worries over public debt, the health of the banking sector and continued strains on the euro currency.
The world economy is still in uncharted territory, this economic recession and recovery – with its financial origins and unprecedented debt overhang – is very different from past experiences. It looks like interest rates will stay very low for the foreseeable future, inflationary pressures not really a significant issue. On the upside, Asia is still looking very strong (though China's car market and industrial growth is bound to slow in the second half).
Mr Bernanke has effectively reminded everyone that it's not business as usual and that this economic recovery is likely to be slow and fragile. The rate at which fiscal stimuli can be dialled down without endangering growth prospects is likely to continue to be a contentious issue. I'll be canvassing auto industry forecasters next week to get their latest take on where auto markets – and ultimately industry output – are heading.
A big concern, it seems to me, is where the major developed world economies will be going in 2011. If this economic recovery runs out of steam with interest rates at record lows, inflationary pressures subdued and many governments hemmed in on spending, getting it going again won't be easy. And the risk of a Japan-style period of prolonged price deflation and slump would then be higher. I wonder what Obama makes of Cameron's planned public spending cuts?