BRACE YOURSELVES : SEPTEMBER WILL BE THE CRUELLEST MONTH / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

September 2, 2011 9:36 pm

Brace yourselves: September will be the cruellest month

By Alan Beattie


Welcome back. Did you have a nice break? The global economy did not.


Policymakers returning to their desks this week have switched on their screens to be greeted by streams of bad news. Friday’s US job numbers were simply dire, and gloomy purchasing managers’ surveys, in the US, Europe and Asia – not infallible predictors of future activity, but rarely completely wrong – suggested growth momentum was at its weakest since the dark days of 2009.


Signs of weakness in emerging markets were particularly concerning. There has always been a latent threat that middle-income powerhouses such as China are less decoupled from the rich countries than the bifurcated global economy of the last few months would suggest. Until now, even when consumption looked weak in the rich countries, growth in the likes of China has been kept going by investment, itself fuelled by cheap global capital and subsidised domestic lending. But unless, improbably, developing economies can rapidly switch to a consumption-based model, they are likely to be vulnerable to a serious drop in demand in the US and Europe.


Unhelpfully, the discord and delusion showed by governments in the rich world gives little confidence that they will avoid such an outcome.


Just before policymakers in Europe and the US went on their summer breaks, both reached deals that they touted as determined and collaborative marches out of morasses of debt. Those claims looked improbable at the time, and indications so far suggest strongly that both have failed to drag their economies on to firmer ground.


In the US, the deal over raising the federal debt ceiling at least avoided the truly insane prospect of one of the most creditworthy countries voluntarily defaulting on its sovereign bonds.


But the prospect that this marks a new maturity in US fiscal policymaking looks hopeful to the point of self-delusion. The difficult decisions on reform of its long-term fiscal position have been punted off to a super-committee, on the unanimity of whose deliberations it would be extremely optimistic to place much faith.


More importantly for growth in the short term, the Republicans remain obsessed by the peculiar idea that cutting government spending in a soggy economy with huge slack in labour markets and low long-term interest rates will help growth. Eric Cantor, Republican majority leader in the House of Representatives, bafflingly argued that it was vital that the emergency spending to clear up after Hurricane Irene – a one-off cost representing perhaps 0.2 per cent of annual federal spending this year – be offset by cuts elsewhere.


If the ludicrousness of the debt ceiling debate threatened tragedy, Barack Obama’s attempts to launch a new campaign for job creation has descended into farce. Far worse than the bizarre squabble over what day he can give his speech to Congress next week are the political constraints that will circumscribe the speech’s content.


Many Republicans have voiced scepticism about Mr Obama’s idea of extending a cut in payroll taxes, an idea which in any case is of dubious stimulative benefit. Risk-averse households are likely to save rather than spend tax cuts, and it seems unlikely that a small tweak in the effective cost of hiring extra workers is going to revive a labour market as long as companies are uncertain about future sales and profits.


Friday’s labour market numbers, with the fall in public sector employment exactly cancelling out the rising private sector jobs, neatly illustrated the problem. You can give the US private sector all the labour market space you want: it isn’t filling it.


The one thing that might help is a near-term boost to public spending, but government-phobic ideology has ruled that out. Next week, the White House might well be reduced to creating the illusion of action by packaging some modest adjustments to infrastructure incentives together with a pledge to pass three pending bilateral trade deals – agreements that its own estimates show are of minor importance in creating jobs.


Meanwhile, its European counterparts are showing exactly why financial markets reacted sceptically to their supposed surgical intervention in July aimed at cauterising the bleeding of the region’s sovereign debt crisis. The eurozone promised a financial rescue for Greece and two weeks later the European Central Bank agreed to buy Italian and Spanish bonds in return for more fiscal tightening.


But both parts of the bargain are looking shaky. Few would have chosen Italy’s Silvio Berlusconi, even without the buzzing cloud of sex scandals that reliably accompanies him, as the optimal leader on whose reliability to hang the credibility of eurozone policymaking. This week his government assembled a deeply unconvincing austerity programme. Feebly, it shied away from practical but politically painful measures such as a wealth tax and an increase in value added tax. It also allowed coalition partners to water down proposed cuts in spending. Instead, Mr Berlusconi’s plans rely heavily on better tax collection, a wearyingly familiar magic pony traditionally brought out when more substantive fiscal measures have been discarded.


Greece manages to look even worse. Friday brought the news that talks for the latest tranche of the official bail-out were suspended, amid missed targets for budget deficits.


If governments and central banks thought the summer break would recharge the batteries of the global economy, as well as their own, they were mistaken. Growth is wobbling, and authorities in the rich world are divided and ineffectual. September is set to be one of the nerviest months of an increasingly perturbing year.


Copyright The Financial Times Limited 2011