Kicking the can towards a global recession
A decline in confidence everywhere has led the OECD to slash its growth forecast for 2013. But politicians remain unwilling, or unable, to do anything to help.
Confidence is ebbing away and has been since 2010. "Lack of confidence largely reflects insufficient or ineffective policy responses, both in terms of too little short-term action and a lack of credible long-term strategies.”
Moreover, says the OECD, that’s not because there’s a lack of understanding about what’s required, but because there’s a lack of consensus.
It’s perhaps more a lack of will, than a lack of agreement. As Jean-Claude Juncker, the Prime Minister of Luxembourg and Eurogroup president, explained recently: "We all know what to do; we just don’t know how to get re-elected after we do it.”
Yesterday Juncker hammered out yet another last-minute bailout deal for Greece, in which the IMF agreed to release some more money to prevent Greece’s immediate insolvency, in return for budget reduction promises that can’t be met, that won’t result in a sustainable budget for Greece without economic growth anyway.
In other words everyone agreed, once again, to pretend for a while longer that things would be OK, which they won’t be.
The decline in confidence everywhere has led the OECD to slash its growth forecast for 2013 from 2.2 per cent to 1.4 per cent. The chief economist, Carlo Padoan, adds: "The risk of a major contraction cannot be ruled out.”
Unsurprisingly, Greece is expected to be the worst performer on its books, with the economy shrinking by 4.5 per cent next year. In order not to default and to stay in the euro, Greece needs a dramatic turnaround in economic growth. But that is impossible because it is caught in an austerity loop where a fiscal multiplier larger than one is amplifying the impact on the economy of budget cutbacks.
In essence the OECD is arguing not only for more monetary stimulus around the world to prevent another recession, but also slower budget cutbacks by governments, especially in the United States and Europe, but also possibly in Australia.
In the United States, the fiscal cliff dominates the outlook. Not only must the legislation mandating tax increases and spending cuts be changed, but there needs to be a medium-term fiscal plan to boost confidence.
The Australian economy is forecast to grow by 3.25 per cent in 2013, but it "remains marked by substantial sectoral disparities”. The government may need to slow budget consolidation and will definitely need to boost "productivity by pursuing reforms in taxation, infrastructure and innovation”.
As with everywhere else in the world, business confidence in Australia is declining as political paralysis is driving out sensible leadership. Household confidence is reasonably strong but just in case, the savings rate is stuck at 9 per cent and what spending there is goes on cheap imports as a result of the high dollar.
The political challenges in Australia and around the world are truly enormous: governments have to reduce horrendous levels of debt and large budget deficits while dealing with the social disruption caused by widening inequality, as well as the problem of climate change.
In 2008 the threat of a global economic catastrophe produced a remarkable global response of co-ordinated fiscal and monetary action.
It worked incredibly well, but while economic growth resumed and private debt was reduced, the increased public sector debt offset the reduction and four years later the resulting pressures on governments, and the fact that they either don’t know what to do or simply can’t bring themselves to do it, are such that the global economy is failing once more.
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