Economic Commentary
The global financial
crisis began at the end of July 2007. That is almost three years ago!
With
the onset of the global credit crunch the threat to the world financial
system was judged to be so serious that governments were prepared to
provide as much stimulus as needed to avert catastrophe.
Billions were paid to support banks considered “too big to
fail”, emergency packages were rolled out and interest rates were
slashed to very low levels. Since then things have improved globally, as evidenced by the
rebounds in world share markets since March 2009.
Much
of the recovery has been come from staggeringly expensive programs
funded by governments which were already over extended with debt.
Those governments are now having to decide whether to continue or
slash spending. Recent
months have shown that the downside risks to the global economy have yet
to go away in spite of the denial exhibited by many politicians and
economists. Banks still
have overvalued assets on their books and residential property could
fall further in several countries. Unemployment is high in most developed countries, and shows
little sign of diminishing for some time.
Already indebted governments are facing the prospect of either
paying out high amounts in social welfare, or cutting benefits sharply
as part of a wider debate about who should bear the costs of the
recession. Public service
wages and pensions have been cut in Greece and Spain and more cuts are
likely. This has led to social unrest in several European countries
and could spread further if unemployment stays high. There is considerable disaffection with the idea that the
wealthy bankers, who caused much of the problem, could be bailed out but
that working people would not be.
The
fundamental economic issue now being debated is whether public spending
be maintained to stimulate private sector activity (and employment), or
whether government spending should be slashed to reduce public debt, at
the risk of further reducing economic activity and increasing
unemployment (the austerity approach).
So
far the Euro zone countries and the U.K. seem to be moving towards
austerity, while the U.S. is undecided (the Obama administration would
probably like to continue spending but probably lacks the required
political support). Given that the Chinese are also trying to cool their own
overheated property market, there is a possibility that those countries
trying to cut spending and increase exports will find that there are few
buyers for their products, and that a full recovery remains elusive.
This
leaves the global economy very vulnerable.
The instabilities in the Euro zone are causing global nervousness
and investors have little good news to comfort them. If the new austerity pushes countries further into recession
then a true recovery could be years away.
Interest rates are too low for monetary policy to have any
effect, and falling asset prices are scaring purchasers away. The only good news is that New Zealand is in a relatively
strong position. Canada is
now the strongest western economy followed by Australia and then New
Zealand and several others. All
the “Commonwealth” countries have sound banking systems which is the
key advantage.
