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Hamish McRae: Europe merely a sideshow to global slowdown


A protester carries
a sign saying
'Hands up, this is a
rescue', during a
against the bailout
in Madrid at the

A protester carries a sign saying 'Hands up, this is a rescue', during a demonstration against the bailout in Madrid at the weekend.

A protester carries a sign saying 'Hands up, this is a rescue', during a demonstration against the bailout in Madrid at the weekend.

We have all become so focused on the catastrophe of the Spanish banks -- for understandable reasons -- that we are in danger of missing something even bigger: that the evidence of a global slowdown has been piling up. This is happening irrespective of the eurozone's plight, though, of course, the slowdown in Europe contributes to it.

So the key questions are to what extent the world economy is self-correcting and to what extent policies will, or indeed can, be shifted to encourage more growth.

The evidence first. Two things stood out. One was that the oil price has been falling for the longest period for 13 years on the back of a growing awareness that demand is falling in the two biggest markets, the US and China. The fact that the oil price has fallen some 15pc this year is hugely helpful to inflation everywhere.

The other thing was the surprise cut in interest rates in China, the first since late 2008. The ways in which monetary policy influences the Chinese economy are different from in the West because central direction of investment has a larger role there. But the cuts matter, partly because the price of credit has a marginal impact on the amount people will borrow but more because it gives a signal that monetary policy is being eased.

It seems clear that the Chinese authorities are now seriously concerned about the economic slowdown and are stepping on the accelerator again.

Alongside these two bits of evidence there was the usual noise from the regular statistics, including weak purchasing manager indices from Europe and some similarly weak data from the US on consumer credit. The comments from Ben Bernanke, the chairman of the Federal Reserve, about events in Europe slowing US exports further depressed the markets. Viewed globally, there is a slowdown. So, the first thing we need to know is to what extent there might be offsetting factors. And the answer is that inflationary pressures are easing. The US is particularly sensitive to petrol prices and a fall in oil price feeds through more quickly to consumer demand than it does in Europe.

But if those Goldman Sachs projections prove correct, the UK and eurozone should be close to 2pc inflation by the end of this year.

A fall in inflation is a direct and immediate boost to real incomes; so it is plausible that by the end of this year the worst of the squeeze on real incomes will be over. But a fall in inflation also creates more headroom for a looser monetary policy, more quantitative easing, if things get really bad in the eurozone. China, as noted, is already moving. Mr Bernanke was cautious last week about the extent to which the US might help Europe -- understandably so. Politically, there is no credit in the US for helping Europe bandage what are perceived to be self-inflicted wounds. Referring to the eurozone crisis, he told Congress last week: "Certainly, it is at a point where it is important for European leaders to take additional steps to contain the problem." So there.

But European business is nowhere near as gloomy as it was in 2008 and 2009. So what should we look for in the weeks ahead?

First, the oil price is crucial. If it continues to slide, that will be both a response to fears of a deeper global slowdown but also an offsetting factor to that slowdown. My own expectation is for the price to stabilise around present levels; that, in itself, is good enough to reduce pressure on inflation here and elsewhere.

Second, we should pay attention to China. Third, we should always remember that the US remains the world's largest economy. After China, American consumers are the biggest determinant of global demand.

And Europe? We have to assume that some sort of patch will be applied to the Spanish banking system, which is essential. But we have also to assume that it will be only a patch, nothing more.

How much is enough? It is a question that has kept recurring through history, long before economists tried to measure happiness or "utility", as utopians tried to envisage a perfect society in which everyone had enough to fulfil their needs and to live in harmony.

If you don't believe that, try this: "It is indeed a strange thought that the end should be amusement, and that the business and suffering throughout one's life should be for the sake of amusing oneself."

That was Aristotle. The quote is at the head of a chapter called 'The Mirage of Happiness' in a new book called 'How Much is Enough?', by Robert (an economist) --and Edward (a philosopher) Skidelsky. The book starts with a criticism of Keynes, and in particular his feeling that as incomes rose people would feel their daily wants were supplied and would work for only 15 hours a week to meet them adequately.

It argues that there is no single measure of happiness but instead lists other things needed to lead "the good life". These include the basics, of course, but also health, security, respect, harmony with nature, friendship and so on. And they suggest policies that might push society towards these objectives.

But there is a bit of economic theory that should be noted. It is called "revealed preference", the idea being that you ignore what people say they want but look at what their actions reveal they want. And, in the US and China, it would seem people mostly want more consumer goods. We know what Aristotle would say about that.

Irish Independent