In 2008, banks were in trouble, yet governments were able and ready to act. Immediate decisive action in the US and the UK stabilized the banking system after Lehman Brothers collapsed. This was followed by a coordinated effort at the beginning of 2009. In addition, China continued growing strongly, and together with other Asian markets, the gap was somewhat filled.
The current crisis finds the world in a shabby situation. Western governments are much poorer now after deploying lots of resources to help the economies and the banks.
Chinese Slowdown
China is showing more and more signs of slowing down.
- The unofficial HSBC PMI is digging lower in contraction territory, with scores moving further away from the 50 point mark.
- China’s non-manufacturing sector is also slowing down, yet still in growth territory.
- A shift to internal consumption was supposed to gradually happen, replacing exports. There are no signs of this happening.
- House prices continue falling – this is part of the lower demand of commodities.
- External signs, such as electricity consumption also point to an even deeper downfall.
It’s clear that China will not be the global locomotive.
However, China will likely avoid a “hard landing”. The economic giant is facing a regime change this year, and the outgoing leadership will make an effort to portray a picture of stable growth, even exceeding the official expectations. An economic plunge will wait for now.
No Leadership
The world is currently divided. There are divisions between and within countries.
- China is not only slowing down, but also refusing to step up and lend some aid to Europe.
- US: The current slowdown in the US (detailed beforehand) means that the US will not be a growth engine. The political situation is difficult: the Congress is controlled by the Republicans, while the White House and the Senate are controlled by the Democrats. In late 2008, the chambers were split as well, but there was a much higher will to cooperate. The debt ceiling debacle in 2011 showed that the ability of the US to act and lead is quite limited.
- UK: David Cameron’s coalition government is still sticking to austerity and getting further away from Europe.
- Europe: Germany’s Angela Merkel and France’s Françios Hollande are split on policy. Merkel still insists heavily on austerity while Hollande wants prospects for growth. In reality, the differences may not be that big, but the current split means that Europe lacks leadership in the worst hour.
- Central Banks: The ECB also suffers from the split between the Germans and most of the rest. Draghi is undoubtedly less stubborn and braver than his predecessor, but his ability to act is limited. Switzerland and Japan are busy in interventions to weaken their currencies. The US and British central banks are more willing to act, but this may not be enough.
There’s always hope
This lack of leadership is very worrying at these troubled times. The hope is that we are at the darkest hour, which is just before dawn: that when the different leaders are pressed to the wall, they will find leadership skills and act.
The leaders of the Group of 20 (G-20) will convene between June 18th and June 20th in Mexico. This is followed by a meeting of central bankers at the end of that week and additional meetings between leaders, just after the Greek elections (see the key events).
Will the 20 heads of state step up and act? Will central bankers cooperate?
Hopefully, they will find a way. A global coordination, like at the beginning of the crisis, can change the picture.
What can leaders do?
- Decide on guaranteeing bank deposits on a global level.
- Boost the coffers of the IMF
- Plan for debt restructuring in many countries, not only Greece, and support institutions that will be hurt.
- Cut interest rates
These are some ideas that are easier said than done. The whole world is mired in debt. This debt is causing a lot of suffering. Currently, leaders don’t seem to be willing and able to act to improve the situation. They might step up now. If not, the Gordian Knot of debt will have one solution: cutting it loose – hitting the Reset button.
Some coordinated action will not solve all the problems, but will definitely impact currencies: the dollar and yen will fall, and all the rest will rise.
Unfortunately, the hopeful scenario has low chances of becoming reality. There’s a much greater chance that we will see more of the same.
This article is part of the Forex Monthly Outlook for May. You can download it by joining the newsletter in the form below, which appears on any article on Forex Crunch.