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  • Nov 28, 2014
  • Updated: 11:29am
CommentInsight & Opinion

World economies on autopilot

Richard Harris forecasts a worsening economic outlook next year

PUBLISHED : Tuesday, 04 September, 2012, 12:00am
UPDATED : Tuesday, 04 September, 2012, 10:08am

It is ironic that at a time when we need leadership from our policymakers, they are unable to give us any. They are paid the big bucks for the big decisions but are taking the money and hiding. We are in a period of policymaker paralysis.

August was a good month for European policymakers as they rewarded themselves with long holidays and there has been little news. We are no longer surprised when conference after conference between the 17 euro nations ends without a decision on the debt crisis. Their indecisiveness is unsurprising when the negotiations consist of a host of profligate governments wanting to plug their spending deficits with German money.

Policy paralysis means that if you wait long enough, the problems might go away. But while no one believes in the conference communiqués, the financial markets still wait for them with bated breath.

No decisions mean that you can declare victory and continue to pay yourself the big bucks, eat well on expenses and use the ministerial chauffeur - while blaming the bankers. It helps to softly rotate the top European jobs between policymakers so complaints are muted.

Yet with Greece likely to exit the euro before the end of the year, almost certainly followed by Portugal and Cyprus, policy paralysis is not an option. Sooner or later, a line will have to be defended and that is likely to be over Spain, where the bankruptcy of local governments is becoming contagious. For if Spain leaves the euro, so will Italy, and the experiment with the euro will survive only in Northern Europe.

Moving across the Atlantic, markets were disappointed by US Federal Reserve Board chairman Ben Bernanke's failure to announce a big new stimulus to the economy.

Yet the Fed will never enact serious economic stimulus measures two months ahead of a presidential election.

In the Fed's case, policy paralysis is working in its favour, as doing nothing is almost certainly the right thing - it is keeping meddling politicians away from a US economy that appears quite healthy at this point. The only people hurt by this are the stock market investors.

But while evergreen policy paralysis in Europe is a given, and is seasonal in the US (at the end of its political cycle), the biggest policy-paralysis surprise comes from China.

In the land that turned central economic policymaking from an art form into a science, China's authorities have done little but whisper softly in the past eight months.

Sure, there has been a small relaxation of interest rates and banking reserve requirements from the very tight monetary conditions that existed in 2011.

The leadership has warned of an economic slowdown and talked up exports but there has been surprisingly little action.

Most Chinese economic indicators seem to be falling fast, in line with slowing global growth, and Chinese real growth rates seem destined to test the lowest expectations over the next few months.

The reason for the lack of action is the change of the top leadership at the 18th Communist Party congress. The old guard does not wish to make any major economic decisions so late in the day and the new guard are not yet in power and won't be pulling the levers for another six months.

So, again, the political cycle is paralysing economic policy just at a time when the economy continues to weaken. A central control and command economy needs constant leadership, especially at a time of big transition, as it inexorably moves from being an export-led economy to one that is more dependent on its huge domestic market.

So while the world's economies continue to struggle, the world's policymakers are disabled. In Europe, the solution is likely to be a forced economic restructuring of the continent into a hard North and a soft South. In the US, it is fortunate that there seems little need for action. But the real worry is China - it is used to leadership but looks temporarily rudderless.

Policy paralysis has swept the world for different reasons but with common effect. This is likely to make the issues that policymakers will have to deal with both worse and harder to solve in 2013, than in 2011 and 2012.

Richard Harris is the chief executive of Port Shelter Investment Management

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