With a little less ineptness the world economy could muddle through

1. Economist – Self-induced sluggishness – This year will probably be a pretty bad one for the world economy; it doesn’t have to be The Economist makes that case that with a little less ineptness the world economy could muddle through. There is no excuse for the lack of clarity around the euro zone’s future, nor for America’s fiscal paralysis. Europeans do not need to compound the peripheral economies’ problems with even deeper austerity. A more calibrated approach with more financing and more structural reforms makes far more sense.

The pessimism looks a little overdone. The worst outcomes—a collapse of Europe’s single currency or a hard landing in China—are avoidable. The latest crop of statistics, particularly better-than-expected figures on global manufacturing prospects, argue against a sudden slump. America may do a bit better than forecast. The overall effect should be sluggish, not dire: global output may grow by 3%, the slowest since 2009 and well below the average of the past decade.

One reason why the outlook is so lacklustre is that politicians—especially in the West—will do little to help (and may harm) their economies.

The euro zone has almost certainly already slipped into recession, which most forecasters expect to be short and shallow: a group of seers polled regularly by The Economist estimates that output will fall by 0.5% in 2012. The case for a mild downturn assumes that Europe’s policymakers, however haltingly, are on course to solve their debt crisis; that the European Central Bank (ECB) has reduced the risk of a debt calamity with its recent provision of three-year liquidity to banks; and that the impact of fiscal austerity on growth will be brief and modest.

Those hopes may be misplaced. Uncertainty about the euro zone’s future is still acute, not least because its politicians are more focused on preventing future profligacy than supporting embattled economies today.

Emerging markets may stumble. China’s economy is clearly cooling. And even if, as seems likely, Beijing loosens macroeconomic policy deftly enough to prevent a sharp slowdown, growth this year is likely to be no more than 8%.

If there is a positive surprise, it is likely to come from the United States. That is not because growth there will soar, but because expectations for the world’s biggest economy are so low. The consensus among professional forecasters is that America’s GDP will grow by 2% in 2012, below its underlying speed limit, and far too slow to bring the jobless rate down.

That could prove a bit too gloomy. Unlike Europe, America has moderated the pace of its fiscal tightening, thanks to the temporary extension of the payroll-tax cut. Household-debt burdens have fallen, the housing market shows signs of stability and the labour market is showing flickers of life. But America’s outlook, like Europe’s, is darkened by political uncertainty.

There is no excuse for the lack of clarity around the euro zone’s future, nor for America’s fiscal paralysis. Europeans do not need to compound the peripheral economies’ problems with even deeper austerity. A more calibrated approach with more financing and more structural reforms makes far more sense.

2. Businessweek – Is the Euro Crisis Over?

Hopeful news –

Portugal’s auction of 105-day bills registered a yield of 4.3 percent, the lowest since the country’s EU-led rescue in May. It follows a pattern started last month. Spain’s borrowing costs halved when it sold six-month bills in December as compared with November. Perhaps most notably, Italy sold three year benchmark bonds last week at a yield that was more than 200 basis points lower than in November

Worrying news –

Overnight deposits at the ECB hit a record high of 453.2 billion euros. This reflects the unwillingness of banks to lend as they would rather park it at the European Central Bank. Perhaps even more worrying is that euro-zone banks borrowed a hefty 15 billion euros at the marginal lending rate. In other words, banks are borrowing at the penal rate of 1.75 percent from the ECB, an action taken usually when they are facing funding difficulties and reminiscent of the period when Lehman Brothers collapsed. This, if anything, indicates the euro crisis is probably not over yet.

3. Economic Times India – Noting that a further downturn in Europe will have a significant spillover effect on the Asian economy, the International Monetary Fund (IMF) on Thursday said that Asia nonetheless has the capacity to respond to any new crisis.

If the threatened risks materialise, Asian policymakers have the room to react aggressively. There is still ample policy space in the region, though less than at the onset of the 2008 global financial crisis in some countries, it said.

Some economies have already started monetary easing. Fiscal policy consolidation could be appropriately delayed if external demand were to collapse, especially where low levels of public debt afford space for measures, it said.

Apart from these conventional measures, Asian economies can use an arsenal of additional policies, as many did in response to the global crisis in 2008.

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