Today we are living in the moment with stock and commodities roaring ahead on promise of more government stimulus and rumours that the battered democrats may now agree to extending the Bush tax cuts (set to expire this January) for another year or so. So more government spending and less revenue than projected– all looking good to risk markets today!
Meanwhile economists are now busily lowering their growth estimates for most countries looking through 2011 and 2012. This morning independent macro-econimc group Capital Economics issued this update:
“The world economy is set to slow as the fading of the policy stimulus again exposes the underlying fragilities left by the recession. During this period of transition, growth in external demand for Canadian goods and services is already weakening. We expect this to contribute to a sub-par economic performance over the next two years, and have cut our GDP forecasts accordingly. We now anticipate growth of 2.2% in 2011, down from a previous forecast of 2.7%, and just 2.0% in 2012, down from 3.0%.”
Growth of 2% for the next couple of years means no meaningful job growth and probably more job losses as over-capacity in the world economy continues to downsize.
Bulls may say it is good that the future looks weak as that means the Fed will continue to pump world markets. But as the Wall Street Journal points out this morning Captain Ben charts a treacherous course:
“There is no guarantee the U.S. economy will be in markedly better shape by June, even with a stimulus of this size. In fact, the Fed's loose-money policy has driven down the U.S. dollar and pushed up not just stock prices but commodities too. That risks undermining the purchasing power of U.S. consumers—particularly lower-income households that can't compensate for higher costs by bidding up wages and miss out on the free lunch of asset appreciation.
While there are plenty of reasons to believe the Fed will keep pulling the monetary lever and pushing up assets, there is little historical evidence that QE really can generate a stable, self-sustaining recovery. Investors, in their euphoria, may want to pause for thought as the Fed heads further off the map.”