As political leaders strive to reduce their budget deficits and maintain their country’s credit-worthiness, the world economy struggles to get going and confidence levels plummet.
Rebecca Spong asks whether the market should accept that slow growth is inevitable...
A confidence-boosting exercise
Despite my arguments in my last Viewpoint that there was plenty of reasons for the trade finance market to be cheery, it seems that my optimism was not catching.
The latest slew of statistics to be released suggests that confidence is at an all-time low and that global economic growth is slowing down.
Weak jobs data released in early September revealed that the US failed to boost employment in August.
The US has seen a distinct slump in consumer demand in August, falling to its lowest level since April 2009, according to official data.
Confidence in the financial markets is continuing to be battered by events such as the August US downgrade and the continuing eurozone debt crisis.
Both in the developed and emerging markets, economic growth and manufacturing output seem to have stalled.
Manufacturing activity in the UK slowed for a second successive month in August, according to the UK Purchasing Managers’ Index.
India’s GDP grew by 7.7% between April and June this year, marking the country’s weakest growth for six quarters.
Factory output in Japan also rose by only 0.6% in July, compared to the 3.8% increase in June.
National governments have been united by their desire to reduce their countries’ deficits and maintain their credit rating to maintain international investor interest and to wean their economies off an addition to debt. But this has in part been responsible for slowing growth.
Portugal is the latest to announce cuts, revealing some of the biggest reductions to government spending in 50 years.
In Spain, politicians are backing plans to hold a vote to introduce a constitutional cap on budget deficits.
The lack of general economic growth is reflected by the recently released trade growth figures from the OECD. In the second quarter of this year, merchandise trade growth across many major economies slowed. Total imports of G-7 and BRIC countries grew by only 1.1% in the second quarter, compared to 10.1% in the previous quarter. Total export growth reduced to 1.9%, compared to 7.7% in the previous quarter.
These figures suggest that the success of the various government initiatives to boost exports has been relatively patchy. Any slowdown in trade will also worry the trade finance market.
But what is imperative to the success of any export-driven growth strategy is having adequate global demand both in the developed world and in countries such as Brazil, China or India.
Yet with spending cuts, high unemployment and the resulting low consumer confidence, demand for goods and services is inevitably dwindling.
Somehow a balance between cutting national budget deficits and boosting consumer demand needs to be found.
Or perhaps some comfort should be taken in the fact that at least there is some growth. Even if this growth is slow.
It might help to look at developments in the financial markets from a psychological perspective, as well as from an economic perspective.
According to psychologists*, they often advise that to help boost confidence and to cope effectively with the problems life throws at us, it is important to maintain realistic expectations.
If we maintain unrealistic and inflexible beliefs, for instance in this case about how quickly the economy should have recovered, then we perhaps can’t be surprised when our expectations aren’t met.
Believing that the global economy should have returned to the standards we lived by in pre-crisis years is perhaps unhelpful.
It might be a case of just grinning and bearing the current sluggish stop-start recovery until governments have been able to bring their national budgets under control.
Do you think the market has been unrealistic in its expectations of how fast the global economy would recover?
How do you think confidence can be boosted?
*Various well-informed psychologists
Click here to read last week's Viewpoint