Programme Paper

Project: Global Economy and Finance Department

Vanessa Rossi and Rodrigo Delgado Aguilera
  • The latest data point to a modest pick up in economic conditions albeit activity levels are still dangerously weak versus pre-crisis peaks. Following confirmation of a bounce back in growth for Asia (including Japan) in the second quarter, there was much greater surprise at the announcement in mid-August of a small pick up in GDP for France and Germany, spelling the end of recession for these two leading EU economies.
  • Less fortunately, there was little critical appraisal of what the figures actually portrayed for the European economy as a whole. In particular, a further drop in imports in both France and Germany, on which the gain in GDP depended, was downplayed. This pointed to still weak business confidence and destocking as well as the failure to provide positive support for trade partners. Indeed, the rise in GDP could be called a "beggar-thy-neighbour" rebound rather than a true recovery.
  • There was little mention of the 1% drop in GDP and falling exports seen in the Netherlands, an EU bellwether for trade. Spain and Italy also saw GDP decline further and the overall figure for the Euro area fell 0.1%, with EU GDP down 0.2%. The region is not out of recession yet.
  • In spite of these caveats, the third quarter should see a more generalised pick up in demand and GDP across the major economies. Easy monetary and fiscal policy, improving sentiment and bargain prices are encouraging a rise in consumer demand, with incentives including car scrappage rebates that have been one of the most successful policy cloning operations across the major economies. But companies and thus business investment remain under pressure due to the reduced level of domestic and global demand as well as the fiercely competitive environment.
  • Policymakers must now turn their attention to the problem of regenerating business optimism and investment plans, which depend on confidence in future growth. G20 need to provide a last push to complete the job of launching a convincing recovery by 2010 before setting to work on credible exit strategies.