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The Global Economy – a Glass Half Full?

Global economy | The Global Economy – a Glass Half Full? Anthony Harrington

The famous dictum about the difference between pessimists and optimists seems to apply equally well to views about the global economy. In the eyes of Brian Moynihan, President and Chief Executive Officer, Bank of America, the glass is half full. For many a blogger and market commentator, by way of contrast, the glass is a bit more than half empty and we are all headed for an almighty smash. Europe is going to break apart, America is ruined and the world as we know it is going to end.  

It’s a familiar tune. There is a certain seductive power to playing the role of the prophet or prophetess crying doom and there is no shortage of voices wanting to say “I was the one who foretold it all.”  

It is much less exciting to predict that the global economy is likely to be on the back burner for, oh, seven or eight years, bumping along between near zero growth and two percent if you strip out the contribution made by developing markets – with occasional dips back into recession territory being well on the cards. That is not the end of the world as we know it. It is just muddling along in a grim old way, and pretty much what you would expect after a credit driven crash. Recovery from that sort of crash is grindingly slow, or so history tells us, and is just something to get through.  

For Moynihan, stripping out the contribution by developing markets is precisely the wrong thing to do, since if you focus on total global growth, which he puts at probably around 3.9% in 2011, “that level of global economic growth implies great business opportunities for those who have the knowledge and resources to go after them.” (That’s the spirit, Brian…)

In a recent speech to the Bank of America Merrill Lynch San Francisco Investor Conference, Moynihan admits that what we got after the crash was not the much touted V-shaped recovery but something “a little more complicated than that…”

On the positive side, US manufacturing has improved for 12 straight months, albeit some of the improvement being down to a rebuilding of inventory, which boosted GDP. Also, US households continue to repair their balance sheets, with debt being slowly chipped away and savings going up. But consumers are also spending a bit, which is good news for the US economy. Moynihan points out that BoA is seeing increased credit card spend this year by comparison with last year.

But, he admits, there are headwinds. Stubbornly high unemployment with the official figure being just under 10% and much higher if you bring under-employment into the equation, is not helping. Companies building cash rather than drawing on available bank overdrafts signals employer uncertainty. The vacant housing overhang is monumental and will take years to resolve. Then there is the small matter of US Government debt “reaching levels relative to GDP not seen since World War II… US debt has increased from 40% of GDP to 100% in the recent economic crisis,” he told delegates – and that was before QEII kicked in.

Yet despite all this, Moynihan points out that “the US economy remains remarkably flexible and resilient”. His answer to the crisis is straightforward:

"Our great challenge is to ensure we do all we can to keep the economy growing in the near-term… but also to couple that with very serious, concrete, long-range planning for deficit reduction… and an intense focus on trade expansion and innovation, which will be a key factor in putting Americans back to work…"

Moynihan’s strongest point is that a major economy – and they don’t come any bigger than the US economy – is an incredibly resilient system. It may look broke, but even if employment and underemployment hit 20%, that would still mean that the economy was 80% fully functional, and by the laws of the jungle, that 80% would tend to contain a very high percentage of companies who had been made fit and lean by two years of tough times.

The big worry, and it is one that is being loudly talked about in Europe and much less so, if at all, in official circles in the US, is the huge benefits burden being laid by the present generation upon the shoulders of the yet to be born. Figures of $74 trillion in unfunded debt for the US benefit system, including medi-care, are being bandied about among the bloggers in the US. The ability of politicians to spend deep into the future is part at least of what gave Greece its current problems and is a huge problem for France and Italy, both of whom are tied to pension promises that the state can’t hope to afford for much longer.

The real problem for developed democracies with demographics that are increasingly skewed towards ageing voters is that no one votes their benefits away, and if the government tries to take them away by simply legislating them out of existence, they will increasingly get hammered by the grey vote. The lesson for politicians is that the longer they procrastinate about tackling tough issues like pensions retirement age and the scale of unfunded benefits, the more the demographic picture will pile up against them.

For further reading on demographics and the global economy:

Tags: Bank of America , demographics , global economy , grey vote , manufacturing
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