Readers with children may recall the phrase “Fasten your seatbelts… it’s going to be a bumpy ride” spoken by the Shrunken Head in a 2004 Harry Potter film.
More mature readers may recall it as a misquote of a Bette Davis line from the 1950 film All about Eve. Either way, it’s as good a way as any to picture what may unfold in the global economy next year, the UK included.
Exactly what will happen in 2012 is of course far from clear but all the indications are that it will indeed be bumpy.
The looming possibility of Europe sliding back into recession, slow growth in the United States and a slow down or even ‘hard landing’ in China all add strong headwinds to an already fragile demand side position here in the UK, the latter driven by a tight squeeze on real incomes made worse by the Government’s front-loaded austerity fix.
The eurozone in particular is at a perilous juncture and while recession is not certain it looks increasingly likely as the eurozone crisis plays out without an adequate political solution to a toxic cocktail of woes.
The latter includes a huge private-sector bad debt overhang on Europe’s zombie banks, the ongoing sovereign-debt crisis, a re-surfacing credit crunch, a fundamental lack of competitiveness in the eurozone periphery (which is unable to use devaluation as a shock-absorber in the way that the UK has) and a headlong rush into fiscal austerity across the continent.
While the recent EU summit may have moved Europe a step closer towards fiscal union, the financial markets are already taking apart what was another attempt to ‘kick the can down the road’.
Germany has yet to offer the ‘big bazooka’ that the markets want, nor has the ECB shown any sign of becoming the buyer of last resort so needed to bring sovereign bond yields down. And so far the new fiscal pact looks more like an ‘Instability and No Growth Pact’ that entrenches austerity. Europe, sadly, seems to be sleepwalking into depression, and some form of eurozone break-up.
Meanwhile, the US has seen stagnating incomes, ongoing downward pressure on property prices, weak job creation, rising inequalities which have further weakened overall demand, and political inaction.
Like the UK, the slow growing US economy faces a Japanese-style ‘balance sheet’ effect as households in particular pare down debts (what economists call ‘deleveraging’). Such deleveraging has only just started in earnest in western economies and the balance sheets of households, financial institutions, and governments are all severely constrained.
The exceptions are big firms, which are now happily sitting atop huge cash piles, unwilling to invest given uncertainties in the economy.
Simultaneously, the tensions in China’s growth model are just becoming clear, as John Clancy has been pointing out in columns here at the Post. Recent growth there has relied on an enormous construction boom fuelled by property prices which have surged ahead, exhibiting all the signs of a classic bubble.
The explosion in credit in large part took place through an unregulated banking system outside of government controls and guarantees.
With the property bubble starting to pop, there is genuine fear as to what will unfold and how the state will handle the fall out. Having tried to engineer a soft landing by squeezing credit, China’s government may be wondering whether it now faces a hard landing and if so, how to get growth going again when overseas markets like the eurozone look so ropey.
