March 27, 2012 Patrick Oliver-Kelley

The world economy seems to be showing slight signs of life…though there are still large risks out there. A stronger employment picture fuels income and spending and the drag of the housing bust is passing. House prices remain soft, but both house sales and construction have begun to rise. The US economy will probably grow around 2.5%. Europe however, remains a long way from recovery. The European recession is shallow.

China’s trade figures were dismal, swinging to a massive trade deficit in February, due mainly to seasonal distortions, but also to faltering demand for its exports. Being a managed economy, the government will not allow too sharp a slowdown. Japan has upgraded its view of consumer spending, business spending, and public investment. The Japanese economy too, is picking up slowly. UK retailers sold fewer goods than expected in the last two months. Consumer spending remains under pressure. Europe needs to create growth, and the US needs a plan to reduce the budget deficit without stifling the nascent recovery. A sudden oil shock could threaten the fragile global recovery. The question of Iran’s nuclear ambitions is a continuing conundrum that could have major consequences.


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Since mid 2009, the US economy has been bogged down repeatedly. There was an awful lot of ‘worse’ in past years. It is no longer getting ‘worse’. Rising oil prices, Europe’s debt crisis, the hangover of the recession, consumers paying off debt, lenders reluctant to lend and the housing market being moribund made for a tasteless stew of my bad news. Some of those impediments have gone away. Unemployment rate fell a bit as did the number of people filing claims for government unemployment benefits; The Fed is toying with a new round of quantitative easing; Stock markets have jumped to life; Retail sales figures are improving and the major banks, with some exceptions, passed the Fed’s stress tests.

However, GDP numbers are not looking healthy. Growth is likely to be meager. The construction industry is improving, but housing prices may continue weak to negative. Europe’s recession seems to be mild. Crude oil prices moving higher can be a major damper on growth, worldwide. The US economy is rebalancing itself, but it still needs to export and invest more. Manufacturing employment is finally rising and time factories work is higher than at any time in 60 years. The CPI rose 0.4 % in February on higher gasoline prices and on almost every other consumer item from cereal to medical care. Rising petrol prices remain a big worry. The hint… inflation.

Fresh U.S. Treasury data suggest that China has lost its taste for investing as much of its $3.2 trillion in foreign-exchange reserves in U.S. dollars and may be increasing its holding of euro-denominated securities during a time that a debt crisis has roiled European markets. Economists have long warned that if China started to cut back its purchases of U.S. securities, U.S. interest rates could climb, damaging the U.S. economy. China’s diversification of its vast reserves, however, hasn’t caused disruption so far, partly because of strong global demand for U.S. securities as a safe haven during troubled times.


The question must be asked- Can the EU live within its means? Stricter rules, of late make growth, the essential element lacking in Europe today, remote. The world criticizes Germany for being strong, though its regime is born out of experience, its models and its stability and its cutting out of debt. Germany stresses responsibility and competitiveness. It keeps wages low, builds quality products, exports around the world, and its labor force works, rather than strike. Germany favors rules and fiscal rectitude.

But the rest of Europe has a severe demand problem. Austerity without growth, with high unemployment makes a terrible mess for its citizens. The rest of Europe asks a very un-German question: If measures inflict severe social injuries on its weakest citizens, is the Eurozone worth saving?

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