Global government's fiscal 'great unwinding' is next key to economic recovery

Tuesday 23rd March 2010

As the global economic recovery continues to gather momentum the next task is the management of the “Great Unwinding,” where governments and central banks ease off on support measures put in place during the worst global recession since WWII.

This is “the unwinding of the extraordinary monetary, fiscal and liquidity measures that were put in place during the darkest days of the crisis,” said Bevan Graham, chief economist at AXA Global Investors. “The timing and sequencing of these moves will be critical. In our view, the hardest task ahead in many countries will be getting fiscal policy back onto a sustainable path,” he said in AXA’s quarterly strategic outlook.

“Governments around the world, particularly developed countries, are struggling to balance the realities that expenditure has gone up as they try to support economic growth and maintain entitlements, while at the same time revenue has dropped as the recession has bitten deeply into the tax take,” he said. “Fiscal balances have therefore deteriorated and public debt has now moved higher.”

One of many policies that will need to be reviewed in developed countries is the age of entitlement for retirement and pensions the report said. Australia is raising the retirement age to 67, Ireland pension system overhaul includes lifting the age of entitlement to 68, while the US is considering an increase from the current limit of 67.

For a sustained and strong period of global economic growth, recoveries in countries such as the US, the UK and New Zealand need to be export-led rather than the old pattern of debt-fuelled consumption and speculative housing.

Signs such as weak personal lending figures and sharply higher household savings as well as sluggish consumption recoveries in these and similar countries “mean a different and slower recovery from what we would normally expect to see, but that’s actually a good thing,” Graham said.

Global economic growth in the second half of 2010 could be weaker than the first half as authorities in China and India start putting on the growth-brakes to prevent asset-bubbles, and governments all around the world start to rein in big fiscal deficits.

“But at the same time, it is not too early to start musing on at least the possibility that should all these challenges be overcome, that we are at the dawning of a new age of global prosperity,” Graham said.

As well as rebalancing economic growth, the global political environment has also changed he said.

In the old world, the Group of Seven leading industrial nations (G7) was the dominant multi-lateral force, but the global financial crisis has changed all that and it no longer holds the moral high ground on how to manage and monitor the global financial system, let alone the global economy.

“In reality it is only at the G20 level that any discussion on matters of global import can in any way be meaningful,” he said.

This is mostly because the G7 excludes the four major emerging market economies of Brazil, Russia, India and China (BRIC), without whom any meaningful progress on the future shape of the global financial system can be made.

Businesswire.co.nz

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