It's transition time. Each week that passes adds to the pile of information about the gradual resumption of growth in the world economy. Quite a lot of that information is negative, with unemployment still rising just about everywhere and consumption muted as families rebuild their savings. But more and more is starting to be positive: not brilliant, but not dreadful. That leads into a debate about both the general shape of the upturn and the likely performance of the major economies.
I have been looking at some work by Goldman Sachs on this, which deserves a wider audience if only to clarify some of the uncertainties. Goldman is currently in the news as a result of its strong profits performance, making more than $3bn in three months, and the consequently high bonuses that will accrue to its people. Goldman has its enemies, but I have always felt the 10th Commandment is the more appropriate response to this sort of news. Whatever you think about Goldman's financial performance, though, the record of its economic team has been pretty good through the crisis. So what is the message?
The bar charts show the bank's latest growth forecasts for the G7 and the BRICs for this year and next, confirming the picture of a general, if muted, recovery. To me, the most interesting aspects of the forecasts are the relatively solid recoveries next year for the US, Canada and the UK (and Australia, not shown), coupled with the rather more sombre growth predicted for the large eurozone countries, in particular Spain.
China, as you can see, scorches back with nearly 12 per cent growth. I'll come back to that last point in a moment; focus, meanwhile, on what this says about the shape of the recovery in the developed world.
The Goldman team has been looking at the transition between boom and bust and the implications this has on the recovery. It has looked at a number of previous busts, the crash of 1929, the Latin American debt crisis, Japan's real estate crash, the dot-com bust and so on, and has concluded that a crucial thing affecting the recovery is the speed at which the imbalances that led to the crisis are resolved. The main conclusion for this cycle is that, as far as the main developed economies are concerned, there is still a lot of sorting out to be done, and so the likely shape will be a U rather than a V.
That must be sensible. The US current account deficit is shrinking fast and US consumers are saving again - the savings ratio is back to normal levels already. But the federal deficit is utterly unsustainable and consumption remains at 70 per cent of GDP, as against the 65 per cent of GDP or thereabouts that would be sustainable in the long term. In Europe, there are different tensions, with Germany still overly dependent on export demand, and alongside Italy, facing ever more serious demographic trends. Spain, by contrast, has still to come to terms with the collapse of its construction industry and faces really scary unemployment levels. It is small comfort that the UK seems set for growth at 1.5 per cent next year. Any growth is better than no growth, but in other circumstances that would be a disappointing outcome. And that is before we begin to correct our fiscal deficit, the prospects for which remain as frightening as ever.
The big point here is that this will all take some time to correct. It will eventually correct because we know this is what always happens. Meanwhile, there will be a lot of disruption and some places will come out of this better than others. One region that comes out much better will surely be Asia. What is going on in China is stunning. The total fiscal support being pushed into the economy will be something like $500bn-$600bn during this year and next year. You can see some of the areas that the money is going in the blobs on the right. The biggest single area is transport infrastructure, followed …