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By Alan Wheatley, Global Economics Correspo
August 8, 2011 2:21 PM EDT
From the United States and Italy to Japan and Greece, slow growth is hobbling the capacity of governments to service their debts, spooking markets and sapping confidence and so further darkening the economic outlook.
One of the scariest aspects of the current market trauma, which sets it apart from the meltdown following the collapse of Lehman Brothers in 2008, is that policy makers seem helpless to break this vicious circle.
The only concrete measure to emerge during a weekend of frenzied financial diplomacy was the European Central Bank's decision to start buying Spanish and Italian government bonds in the secondary market.
Although significant, the ECB's initiative was not matched by any policy measures from either the Group of Seven industrial nations or the Group of 20 major economies that might have heartened investors about the prospects for growth.
Markets had to make do instead with warm words from the G7 and G20 about ministers' determination to counter the twin-pronged crisis of crumbling faith in the euro and Friday's downgrade by Standard & Poor's of America's top-notch credit rating.
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"It's the magic wand approach to policy-making," said Stephen King, chief global economist at HSBC in London. "You wave it and hope something happens."
What happened on Monday was that equities tumbled further, demand for safe-haven bonds was undimmed and oil skidded 3 percent as markets priced in lower growth due to evaporating business and consumer confidence.
After experiencing post-Lehman the deepest recession since World War Two, the United States had now been through the shallowest subsequent recovery despite massive fiscal and monetary stimulus, King said.
New York University's Nouriel Roubini, writing in the Financial Times, said the United States and other advanced economies were odds-on for second severe recession even before the latest panic. Former U.S. Treasury secretary Lawrence Summers puts the odds of a double dip at one in three. Harvard University professor Martin Feldstein says one in two.
BIG FISCAL DRAG
One of the ironies of the crisis is that the demands the markets are making of politicians -- reduce your debt or we will cut off your funding -- risk exacerbating the growth/debt trade-off.
J.P. Morgan estimates suggest that a global fiscal adjustment amounting to slightly more than 1 percentage point of gross domestic product is in the cards, led by the United States and Western Europe.
Bruce Kasman, a global economist for the bank based in New York, said contracting U.S. spending had shaved more of off GDP growth over the past year than any time since 1970.
Moreover, the imminent expiration of temporary tax cuts and unemployment benefits was set to combine with discretionary spending cuts to take 1.7 percentage points off GDP growth next year, Kasman said in a note.
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