Programme Paper

Vanessa Rossi and Rodrigo Delgado Aguilera
  • Although Europe and the US are out of recession and look likely to sustain at least a modest pick-up in GDP in 2010, this is a distinctly optimism-lite recovery with a heavy focus on downside risks - in fact the economic mood at the turn of the year has been sombre.
  • Trouble spots, chiefly due to deteriorating public finances and external debt, are breaking out in Europe where the recovery is generally blighted by weak domestic demand, the need for further adjustment in the banking sector and the threat of fiscal and monetary policy tightening - even positive news on Germany's tax package was overshadowed by concern that the financial crisis in Greece could escalate and spread to other countries.
  • Although the UK's overall GDP performance in 2009 was actually little different from that of the Euro area, technically it is one of the few major economies to remain trapped in recession. But analysis shows that the surprising drop in GDP in Q3 was partly due to one-off factors and coincided with unusual discrepancies between consumption, retail sales and service sector growth.
  • In the US, the rebound in domestic demand in late 2009 has been more robust than in Europe and policy looks set to remain easy. Nevertheless, much of the Q3 rebound was due to the cash-for-clunkers program which boosted car sales and the collapse in the commercial property market is adding to distress in the construction, real estate and banking sectors, forcing more closures among small banks.
  • What could turn this rather sombre picture into a Goldilocks recovery? To improve confidence in sustained global growth beyond 2010, it is essential that the recovery gathers pace in the US - this would also shore up market sentiment and stabilise the dollar, helping other parts of the world to sustain growth as well.
  • While stronger internal growth in Europe would also add to a more positive global outlook, arguably it is even more important that the Euro area finds a convincing solution to the economic and financial crises facing a number of member states. If this is not possible, then talk of EU macro prudential oversight will ring hollow and fears for the future of the Euro area will persist.

Further resources

Towards a Post-Crisis Global Economy: Not Out of the Woods Yet, Europe Now the Key Risk?
Programme Paper
Vanessa Rossi, July 2009