[ccebook.cn]The World in 2010

former bubble economies, households will still be increasing their saving and paying down debt. Surplus
economies, such as China, will not yet have rebalanced their economies enough to rely on private domestic
spending. After a few months of vigour, largely driven by restocking and stimulus spending, global GDP growth
will weaken to below its trend rate.
Balancing the need for short-term looseness and medium-term prudence in this sluggish environment will be
the defining policy dilemma of 2010. Even in theory, the right mix of policies in any exit strategy ought to
differ from place to place, depending on the circumstances. Countries whose public finances are in the worst
shape, such as Britain, should focus their tightening on fiscal policy. Surplus countries would do better to
increase interest rates and allow their currencies to rise. In practice, the decisions about whether to cut back
state stimulus (or apply more) in 2010, and how to do so, will be driven by politics as well as economics.
Three factors, especially, will play a big role: the behaviour of asset prices, investors’ perceptions of
sovereign-debt risk and public attitudes to budget deficits.
Asset prices will matter more than consumer prices because, thanks to high
unemployment and ample spare capacity, core consumer-price inflation will remain
low in both the rich world and emerging markets. So, too, will consumers’
expectations of future inflation. Instead, the looseness of global liquidity will translate
into asset bubbles, in things ranging from gold bullion to Beijing apartments. Asian
assets will be particularly frothy so long as the region’s policymakers prevent their
currencies from rising against the dollar. Some commodity prices, too, will rise faster
than is warranted by the pace of global growth. Central bankers’ attitudes to these
signs of asset-price inflation will drive their decisions on whether to start raising
interest rates.
Balancing the
need for shortterm
looseness
and medium-term
prudence will be
the defining
policy dilemma
Investors’ assessments of sovereign risk will become more volatile in the coming year, as the dramatic shifts
in countries’ relative fiscal health become clearer. The big increase in public debt will be overwhelmingly in rich
countries and will be worsened by ageing populations. Whereas the average debt burden in big rich economies
is headed for 114% of GDP in 2014, the average in big emerging economies will fall to 35% (see chart). As
investors focus on that gap, the most profligate rich countries, such as Britain, will suffer.
Finally, the politics of stimulus will become more complicated in 2010. In some countries, such as Japan and
Germany, the new governments’ priorities suggest bigger deficits for longer. Elsewhere, political incentives
point the other way. Britain, for instance, is likely to have a new Conservative government, which will be keen
to cut the budget deficit quickly, so that any attendant pain can be blamed on its Labour predecessor. In
America there will be pressures in both directions. Continued high unemployment will bring calls for more
government intervention, particularly as the country’s mid-term elections loom in November. But public
concern about the size of the budget deficit and scepticism about the effectiveness of fiscal stimulus are both
rising. Some opinion polls suggest people would prefer a weaker economy to higher deficits.
Faced with these pressures, central bankers will do a better job than finance ministers. Central banks’ balancesheets
will remain unusually large, but tools, such as paying banks interest on their reserve holdings, will
allow monetary policy to be tightened nonetheless.
There won’t be much tightening in countries at the centre of the financial storm. The Federal Reserve and the
Bank of England, especially, will keep rates close to zero throughout 2010. But elsewhere central bankers will
react more swiftly to asset prices than they did before the crisis. Norway will be the first to join Israel and
Australia in raising rates. Others, such as Sweden and Canada, will soon follow. Asia’s central banks will also
begin tightening in 2010, though their desire to keep their currencies cheap will, alas, lead them to move too
slowly.
Fiscal policy will be more of a mess. Parts of the stimulus plans that have already been announced, especially
the extra spending on infrastructure, will still be kicking in during 2010. But because few countries will develop
sensible medium-term plans for their budgets in the year ahead, they will have little room to do more.
Towards the end of the year, especially, the prospect of abrupt tightening will be a big risk, as stimulus
programmes start to run out. Just as government spending tapers off, America is set to raise taxes sharply on
high earners and investment income.
History shows clearly that this can be dangerous. In both America in 1937 and Japan in 1997, ill-timed tax
increases sent fragile economies back into recession. The exit strategists of 2010 will have to avoid, if they
can, the same peril.
Zanny Minton Beddoes: economics editor, The Economist
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