GLOBAL - Global economic growth is likely to remain sluggish for the foreseeable future because nations cannot afford to devalue their currencies right now.
“A look at each of the major economies suggests that each one would benefit from the stimulus provided by the weaker currency,” says Tony Dolphin, director of global economics and strategy at Henderson Global Investors.
“But of course, they cannot all devalue their currencies at the same time.”
Most forecasters already expect output to markedly improve in 2004, compared to 2003, in each of the major economies expect Japan.
But Dolphin believes that their optimism is based on little more than a belief that growth rates tend to revert to their long-run trends, and that recent monetary easing will start to bear fruit.
“We are more pessimistic,” adds Dolphin.
“We struggle to identify what will be that source of stringer growth. The global economy cannot rely on US consumers. Other sources of growth will be required - but neither the Eurozone nor Japan seems likely to be able to produce the acceleration in spending required to help out the US consumer.”
According to HGI, a weaker currency will help reduce an account deficit in the US, lift deflation in Japan, revive manufacturing in the UK and kickstart cyclical recovery in Europe, particularly in core economies such as Germany and France which have a historical dependence on exports to boost their economies.
“This is a conundrum with no solution. All these economies cannot devalue their currencies at the same time. The fact that they need to do so suggests that the global economy is unlikely to pick up pace soon.”
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