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Analysis
Plenty of reasons for spring optimism

Plenty of reasons for spring optimism

Why the doomsayers have got it wrong 

by David Marsh

Wed 15 Apr 2015

There’ll be plenty of gloom on display in Washington in the next few days when world finance ministers and central bankers gather for their latest bout of economic parleying. The International Monetary Fund, which hosts its spring meetings with the World Bank, has warned of prolonged lower growth that will keep debt high – and could pave the way for another financial crisis. Christine Lagarde, the IMF managing director, who regularly uses these occasions to parade her worries, will once again be an enthusiastic global Cassandra-in-chief.

However, there are five good reasons why the doomsayers are overdoing it. First, the US is powering its way to recovery, with a generally favourable influence on the rest of the world. Sound fiscal policies and appropriate monetary easing by the Federal Reserve have significantly reduced unemployment without producing inflationary pressures. The ultra-low rates of the past six years are a sign of weakness, not strength. Renewed credit tightening, which if the Fed is courageous should come this summer, would be a sign we are getting back on track.

Second, the fall in oil prices is almost universally good news for the world economy. Sure, it has brought retrenchment in some of the world’s prime oil exporters, but, with the exception of badly run states like Russia and Venezuela, most oil producers have the reserves to overcome these setbacks. Oil-importing countries, which includes a large number of poorer developing countries as well as much of Europe, are huge beneficiaries of moderate prices. 

Third, news from emerging market economies – despite slower growth – is positive. China is enduring a slowdown that will put its economy on a more sustainable path, driven by domestic consumption than by inflated exports. India has rediscovered a more stable growth trajectory under its new Prime Minister Narendra Modi. Both Brazil and Russia are getting used to a drastic fall in activity, but that might produce better policies in the end. Nigeria, the biggest economy and most populous state in Africa, has just held a general election resulting, for the first time, in a government leader’s ousting through the ballot box – a sign of democratic maturity likely to rekindle economic activity.

Fourth, the firm dollar has been a boon for most countries. It may be holding back US exporters and depressing foreign earnings, but dollar strength is normally good for the world economy. Many countries can gear up for higher exports and their companies earn more abroad. As the world’s leading transaction and reserve currency, the dollar can radiate confidence internationally. The decision by the Chinese leadership to let the renminbi follow the dollar upwards and become, in time, a reserve currency, is a wise move. The US congress no longer terms China a currency manipulator, one less cause of world tension.

Fifth, modest growth is resuming in Europe, still home to many of the world’s most technologically adept companies.  The European Central Bank’s quantitative easing, under which it is buying large quantities of government bonds to stoke up the money supply and ward off deflation, is almost certainly unnecessary and is generating asset price bubbles. But for the time being it is adding to the momentum of a recovery that was already under way at the turn of the year as a result of healthier bank balance sheets, low interest rates and oil prices.

Behind the scenes in Washington, a debate is brewing on who should take over from Lagarde when her five year term ends in July 2016. The odds are narrowing on Lagarde, a French lawyer and politician whose pronunciations seldom rise above the humdrum, to be replaced by a more economically savvy candidate from Asia or Latin America. The IMF managing director has traditionally been a European. But the more the developing countries can use world economic tailwinds in their own favour, the greater will be likelihood of a landmark decision that takes account of the international economic shift towards the emerging world.

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