What’s your sense of the global outlook?
My global macro view is still skewed toward a U-shaped recovery in advanced economies, including the U.S., Europe and Japan. I see more of a V-shaped recovery in emerging markets, with the caveat that, if growth gets very slow in advanced economies, then even emerging markets cannot decouple from international currency pressures. Rising commodity prices are going to create higher inflation and some slowdown of growth in emerging markets.
A second point is that in 2011, the first half will show slower growth than the second half of the year. Growth will be much weaker in all advanced economies and, eventually, in the emerging markets compared to the first half, because all the tailwinds of this year will become headwinds. The inventory adjustment is done; the fiscal stimulus will become a drag; the census hiring effects are gone, and most of the tax policy that stole growth from the future will have expired.
We made this call on the U-shaped recovery in advanced economies at the beginning of the year when everybody said this is going to be a V-shaped recovery. They got it wrong, as the recovery was anemic and below trend in the U.S., Europe and Japan. The tail risk of a double-dip recession in the U.S. is now lower than in the middle of 2010, as we have QE2 and another $900 billion tax stimulus. But the unemployment rate will remain high, housing is double dipping and banks are not lending.
You’ve gone on record saying you don’t think governments are going to step up and do what they need to do on the austerity front. Is that right?
In the short run, you need more stimulus because private demand growth is still weak. But over the medium term, you need fiscal discipline. Otherwise, you’re going to have a fiscal train wreck.
In most advanced economies, the right way of doing it is to commit to a medium-term consolidation. That means raising taxes and cutting spending over time, especially entitlement spending, so that nobody in the market’s going to worry if you need more stimulus in the short term.
But the opposite is done in the U.S. There is no commitment to medium-term fiscal consolidation, and, in the short run, we have another unsustainable tax cut plan.
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