Issue link: https://read.dmtmag.com/i/279349
I DA U N I V E R S A L M a rc h -A p r i l 2 0 1 4 47 dented consumer confi dence, but investors' fl ight from risk has pushed down yields on Treasury bonds, which in turn should lower mortgage rates. Fiscal policy is far less of a drag than it was in 2013. All this still points to solid, above- trend growth of around 3% in 2014. One reason this may not excite investors is that it no longer implies an accelera- tion. America's economy was roaring along at a 3.2% pace at the end of 2013. e fi rst few months of 2014 will be weaker than that, even though average growth for 2014 still looks likely to outpace last year's rate of 1.9%. China's economy, for its part, is clearly slowing. e latest purchasing manag- ers' index suggests factory activity is at a six-month low. e question is how far and how fast that slowdown goes. Many investors fear a "hard landing". eir logic is that China has reached the limits of a debt-fueled and investment- led growth model; and that this kind of growth does not just slow but ends in a fi nan- cial bust. Hence, the jitters on news that a shadow-bank product had to be bailed out. Yet it remains more likely that China's growth is slow- ing rather than slumping. e government has the capacity to prevent a rout; and the recent bail-out suggests it is willing to use it. If fears about a hard land- ing in China are exaggerated, then so are worries about a broad emerging-market col- lapse. at is because the pace of Chinese growth has a big direct impact on emerging economies as a whole. Expec- tations for Chinese growth will also be a big infl uence on the desire of foreigners to fl ee other emerging markets, and, hence, on how much fi nancial conditions in these countries tighten. A er more than dou- bling interest rates, Turkey's economy will be lucky to grow by 2% in 2014, compared with almost 4% in 2013. But in most places, less draconian rate hikes will merely dampen a hoped-for acceleration in growth, rather than prompt a rout. e fi nal, paradoxical, reason for guarded optimism is that the market jitters make bolder monetary action more likely in Europe and Japan (see article). With infl ation in the euro area running at a worryingly low 0.8%, the European Central Bank (which met on February 6th a er we went to press) needs to do more to loosen mon- etary conditions. Really bold action, such as buying bundles of bank loans, is more likely when fi nancial markets are in a funk. at logic is even stronger in Japan, where its stockmarket has fallen furthest and where the economy will be hit by a sharp rise in the con- sumption tax on April 1st. So, more easing is in the cards. Still in need of a spoonful of sugar… If this analysis is correct, the current market pessimism could prove temporary. Inves- tors should recover their nerve as they realize that the bottom is not falling out of the world economy. Our prognosis is a lot better than the outcome markets now fear. But it would not be much to get excited about. e global recovery will be far from healthy: too reliant on America, still at risk from China, and still dependent on the prop of easy monetary policy. In other words, still awfully wobbly. ● e Economist, Feb. 2014 Worldwide Wobble Continued from page 45