Nice start to the year. Pity about the rest of it
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There are too many uncertainties ahead to know whether it will continue or crumble, economists say. The world economy has begun the year in fine form. America is cruising along, China is growing faster than expected, Britain is muffling the Brexit downdraft. Even the usually lagging euro zone is perky.
Pity about what lies ahead.
Almost every major economy’s data releases these days seem to follow a similar pattern.
First, they are generally positive – either better than previously or only a little weaker. Then, policymakers and economists come out and say there are too many uncertainties ahead to know whether it will continue or crumble.
“Geopolitical risks are mounting and increasingly catching market attention in such fashion as to risk overshadowing most other developments,” Canada’s Scotiabank told its clients.
The risks are primarily political. How will U.S. President Donald Trump’s “America First” protectionist talk translate into policy? Will Brexit finally come back to bite Britain by cutting off commercial growth and breeding inflation?
For the euro zone, meanwhile, the risks are existential. Elections in France, Italy, Germany and the Netherlands could result in anti-euro political parties gaining significant ground or even taking office. And Greece’s hold on its place in the currency union remains flimsy.
In the past week the extra money investors demand to buy French bonds rather than German ones jumped – much of it because of a comment by an official of the far-right National Front that it would put leaving the euro at the heart of its economic platform.
Polls suggest National Front candidate Marine Le Pen will not win the presidency – but after the Trump and Brexit surprises last year nothing can be ruled out.
Other risks are more Keynesian, revolving around whether years of stimulus from central banks in the form of asset-buying and negligible interest rates are finally producing inflation, which in turn will stop consumers from buying, slowing economic growth.
“Geopolitical risks are mounting and increasingly catching market attention in such fashion as to risk overshadowing most other developments,”
Economics can be very much a game of whack-a-mole.
Up next
The coming week may well be dominated by China, which returns from a holiday with a large slate of data, including the services purchasing managers index – which implied steady if slightly slower growth – foreign reserves data and possibly trade figures.
China grew a faster-than-expected 6.8 percent in the fourth quarter, boosted by higher government spending and record bank lending.
But the economy still faces headwinds from a cooling housing market and possible protectionist measures from the U.S.
The foreign exchange reserves, meanwhile, are on the verge of falling below $3 trillion, although the pace of declines could be slowed by capital controls and the dollar’s retreat.
China is being cautious. It raised a number of policy rates on Friday against what Deutsche Bank described as a dilemma.
“Policy needs to be tightened for financial stability considerations, but (the central bank) wants to control the pace and magnitude so that … the tightening does not trigger disruptive adjustments (bubble burst), and … does not jeopardize the stabilizing growth outlook,” it said.
In the euro zone, there will be German, French, Spanish and Italian industrial production data. All are expected to show growth.
Germany’s volatile factory orders may be under particular scrutiny. They fell 2.5 percent month-on-month in November, a plunge from a 5 percent rise the month before.
Questions & Answers
Q.What are the main political risks causing uncertainty for the global economy?
What are the main political risks causing uncertainty for the global economy?
Political risks include the potential impact of US protectionist policies, Brexit affecting UK commercial growth and inflation, and anti-euro parties gaining power in upcoming European elections. Greece's position in the euro zone also remains precarious.
Q.How might central bank policies contribute to economic uncertainty?
How might central bank policies contribute to economic uncertainty?
There is a risk that years of central bank stimulus, such as asset-buying and low interest rates, could finally trigger inflation. This inflation could then deter consumer spending and slow economic growth.
Q.What is China's current economic situation and what are its immediate challenges?
What is China's current economic situation and what are its immediate challenges?
China started the year with faster-than-expected growth, boosted by government spending and lending. However, it faces headwinds from a cooling housing market, potential US protectionism, and foreign exchange reserves nearing $3 trillion.
Q.Why did the extra money investors demand for French bonds jump recently?
Why did the extra money investors demand for French bonds jump recently?
The jump was largely due to a comment from a far-right National Front official. This official stated that leaving the euro would be central to their economic platform, causing investor concern.
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