Despite the best efforts of central bankers around the world, the consensus among our readers is that the global economy is getting worse.
That seems a good call given the fall in global stock markets yesterday, after the World Bank cut its forecast for economic growth in China and fears about the eurozone intensified. Corporate earnings season is also due to start in the US this week, with expectations set to low after profit warnings from companies including FedEx and Hewlett-Packard, led mostly by weakness in Europe.
A surprisingly good jobs report in the US last week provoked a brief outbreak of optimism. Indeed, the numbers were so good they inspired a conspiracy theory among some fringe lunatics — a group that now apparently includes former GE chief executive Jack Welch.
Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers— Jack Welch (@jack_welch) October 5, 2012
It doesn’t take much to rattle Paul Krugman’s cage, and the Pulitzer prize-winning economist wasted no time in taking Welch to task, describing the charge as “nonsense” in his New York Times blog. Krugman went on to claim that the broad trend during the past year, as opposed to just one print, shows slow but consistent improvement on the job front.
The Citi Economic Surprise Index, which measures whether data is above or below consensus expectations, spiked to its highest level since March after the jobs report and is once again firmly in positive territory.
Even stocks have shown surprisingly low volatility recently, despite yesterday’s drop.
However, gloom in Europe is certainly weighing on the global outlook and a tight presidential race in the US is not helping.
Mitt Romney’s performance in his first debate with Barack Obama last week helped to close the gap between the two candidates, raising the possibility of a surprise win for the Republicans. It is not clear how markets would react to that, but any added uncertainty is probably a bad thing at this point.
Meanwhile, the jury is still out on whether extraordinary central bank actions in Europe and the US will work. Another Nobel laureate, Joseph Stiglitz, shares our readers’ pessimism.
“For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy,” he wrote in an article published during the weekend. “Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending. The current downturn, already a half-decade long, will not end any time soon. That, in a nutshell, is what the Fed and the ECB are saying. The sooner our leaders acknowledge it, the better.”
It seems unlikely that any leaders are about to do so. Neither Romney nor Obama have any plans to start big spending programmes, and nor do the Germans. The best hope is that Stiglitz’s lack of faith in monetary policy is misplaced.