Macro Economics - Multiple challenges still await international action from policy makers to support the fragile growth


The recent economic crisis inflicted substantial damage on the public finances of many countries around the world. Enormous stimulus programmes

Global economy:
The recent economic crisis inflicted substantial damage on the public finances of many countries around the world. Enormous stimulus programmes, bank bail-outs, increased welfare and unemployment payments, and depressed tax receipts weighed heavily on government balance sheets. To make matters worse, some countries were already running substantial deficits before the crisis hit. Luckily some countries, especially in Asia, entered the crisis with more solid balance sheets. When fears of another great depression began to recede, news of another crisis began to emerge.

The aggregate budget deficit for the OECD is expected to be around 7.5%, while public debt is forecast to be about 30% of GDP higher in 2011 than it was in 2007, before the crisis. Though some countries appear to be handling the fallout of the crisis better than others, growth remains subdued.

One problem is that in today’s global markets, financial difficulties, whether in large countries or even in relatively small developed countries, can affect the entire financial system. The responses also have to be international.

Some of the world’s largest economies, including US, EU and Japan - whose debt level has long been high and is projected to top an astonishing 200% of GDP in 2011 - have also seen their public spending skyrocketing in recent years. In fact, all OECD countries saw their fiscal positions deteriorate in 2010. The US budget deficit, which stood at 10.5% of GDP in 2010, has focused on stimulus, while also dealing with the fallout of the crisis, including a rise in long-term unemployment. Increasingly the US debt situation, which is an issue across all sectors of the economy, also represents an enormous challenge to overcome.

Market pressures have also prompted several large economies to announce draconian austerity plans, while others have decided to wait, worried that spending cuts in an uncertain economic climate would hurt the economy. Some economists have called for increased stimulus spending to prevent weak recoveries from reversing back into recession. The recovery, where it is taking place, continues to be very fragile.

Private consumption figures in February came in better than expected, but for the first quarter as a whole, we could be looking at private consumption growth of below 2%, which represents a halving of the growth we saw in fourth quarter 2010. Thus overall GDP is expected to grow slower than previously expected.

The US housing market continues to struggle. Despite an apparent stabilisation of houses sold, the residential real estate prices dropped in January by the greatest amount in more than a year according to the S&P/Case-Shiller index. The Federal Reserve recently stated that “the housing sector continues to be depressed”, despite information that “suggests that the economic recovery is on a firmer footing”.

Counterbalancing this negative trend is the fact that the US added jobs for the sixth consecutive month in February and the unemployment rate fell to the lowest level since April 2009, standing now at 8.8%. However, rising food and energy prices prevents the full potential of private consumption from being unleashed.

The Chinese inflation rate in February remained at 4.9% p.a. despite recent monetary policy initiatives to combat the higher price levels. The upward pressure on inflation stems primarily from constantly rising food costs and oil prices. This kind of inflation affects all people, and social unrest is an unwanted potential knock-on effect. To ease the inflationary pressure on food prices, national food stocks have been opened up and a plan for higher production of domestic foodstuff has been launched.

Moreover, Chinese authorities continue to take austerity measures to curb inflation. Inflationary pressure from rising prices on imported goods as well as pressure from strong growing liquidity from new loans in the Chinese market has left inflation growing at a higher pace than the interest rate, triggering negative real interest rates.

China experienced a rare trade deficit in February as the Lunar New Year celebrations held back exports.

The 11 March natural disasters that hit Japan have affected not only the local region, but the events have also affected the global economy considering Japan’s central place in the global supply chain. Japanese GDP may be cut by 0.9% in 2011. To cope with the aftermath of the 9-magnitude quake and subsequent tsunami, the Japanese government is trying to compile a “spending package” for the medium-to-long term recovery of the affected areas. A massive effort to rebuild the infrastructure ranging from railway tracks, roads, reinforced concrete tsunami sea walls to power grids and ports facilities, will impact the coming years.

In the early days after the event, the Yen appreciated to the highest level ever against the US Dollar. A historically swift response by G7 was welcomed by the Bank of Japan, and it helped to ease the pressure on the currency, preventing Japanese exports suffering even more.

The debt crisis in Europe continues and Portugal appears to be next in line for another joint EU/IMF rescue mission. To combat any new debt-crisis situations, the EU has set up a permanent European Stability Mechanism (ESM). This mechanism is designed to provide capital for members in need of liquidity in the form of direct loans up to as much as EUR 700 billion. Ongoing uncertainty in the financial markets about their weak public finance situation prompts Ireland, Portugal and Spain to repeatedly reassure the markets that their investments are safe.

The European Union as a whole is expected to grow by 1.7% in 2011, down from 1.8% in 2010 according to the IMF. But the gradual recovery and growth is also expected to be uneven, with Germany expanding by more than 2% and Greece and Romania to see negative growth. As most nations struggle with public deficits and increasing debt levels, the contribution to growth in Advanced Europe coming from public consumption is expected to be negative in 2011. But more important is that for the EU as a whole, 50% of total growth is attributed to private consumption.

While the full extent of the disaster is still uncertain, the aftermath of the Tohoku Earthquake and Tsunami is expected to affect shipping both in the short and longer term. There are basically three trends to watch out for: 1) acute shortfalls due to refinery closures and large-scale shut-downs of utilities, 2) medium-term solutions to restore power generation and distribution 3) potentially a permanent change in the energy mix going forward. The trends will affect the major shipping segments differently, but in what way and to what extent is still too early to conclude without a high degree of uncertainty.

The OECD believes that governments should start reining in their budget deficits from 2011 otherwise the continued deficits and rising debt will reach a critical stage. This leaves governments with very difficult decisions. How can they restore public finances and promote sound economic growth at the same time? Where should they cut spending? How can they make changes to activate labour markets and improve competition? Striking the right balance will not be easy, and the fiscal challenge is sure to dominate global policy agendas in 2011.

In the meantime, practically all segments of shipping will be impacted by the economic fragility, with corresponding high volatility in freight rates during 2011.

Peter Sand
in Copenhagen, DK


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