Despite the odd wobble, the US economy continues to thrive. Employment remains robust, household wealth is on the rise and the housing market is strengthening.
Even allowing for the occasional bump in the road, a reasonable forecast is for average US annual growth of about 3 per cent over the coming three years. Our own economy is similarly hale. Unemployment is forecast to tumble from 6.2 per cent this year to 5.5 per cent next year, while GDP is expected to come in well above 3 per cent, making the UK the fastest growing G7 economy in 2014.
Meanwhile, Abenomics has already succeeded in jarring Japan’s economy from two decades of slumber with the Topix index rising more than 50 per cent in the five months following the implementation of the new policies at the end of 2012. An increase in sales tax this year may have delivered a painful contraction in GDP last quarter, but it is clear that Japan’s leadership is committed to keeping its nascent recovery on track.
In contrast to the world’s other mature, consumer-driven economies, Europe continues to drift. And, after more than five years of extraordinary monetary policy in the US and UK, the gap between Europe and its peers has rarely been wider. This growing chasm resulted from the way in which each responded to the financial crisis in 2008. September saw the sixth anniversary of the Lehman Brothers collapse. The largest corporate bankruptcy in history marked the start of very different paths for the US, the UK and Europe.
The US and UK quickly adopted a systematic approach to shoring up their banks and recapitalising the financial system. Banks that were beyond salvage were either allowed to fail, nationalised or put on the auction block, drawing a line under banking liabilities, even if it required private debt to be moved onto the public balance sheet. In tandem with the extraordinary monetary policy that accompanied such measures, such actions created the conditions for recovery.
In Europe, the position was quite different. With no single body empowered to take action, no consensus and no concept of a pan-European balance sheet to fall back upon, the individual economies in the region continued to flounder, culminating in a sovereign debt crisis. So while banks in the UK and US were busy reviving, many of those in Europe lapsed into coma. With no means to compare the liabilities of a German bank with a Spanish bank, for example, it was impossible to sort the wheat from the chaff. Meanwhile, those banks still in business were forced to retain capital to rebuild their balance sheets, rather than lending it out.
It has taken six years, but Europe’s big banks have now almost achieved the capital buffers required by their regulators. This means they can finally turn from balance sheet rebuilding to lending, supporting Europe’s economies in the process. Even so, while the UK completed its quantitative easing back in 2012 and the Federal Reserve will be ending its asset-purchase programme next month, we still expect to see the European Central Bank being forced to follow suit if it is to combat the threat of deflation. If Europe’s markets react in the same way as Japan’s, the results could be spectacular.
