Checking the Vitals - First Aid Economy

Checking the Vitals – First Aid Economy

The International Monetary Fund has warned the global economy has entered what it calls a “dangerous new phase” of low growth and high public debt. Everybody knows that there is too much public debt. It’s a serious gaping wound which won’t go away and needs treating.

Have you ever undertaken a first aid course? If not, you should. It’s a selfless act which might save a life.

If you have been trained and come across somebody with a gaping wound, then you’ll know that one of the first things to check is that your patient is breathing. The logic? If you don’t breathe, it won’t take long for your heart to stop pumping oxygen-carrying blood around your body (including to the gaping wound). This is not to say the gaping wound isn’t serious – it could be life-threatening. It’s a matter of priorities. And just so with the economy.

The International Monetary Fund has warned that the global economy has entered what it calls a “dangerous new phase” of low growth and high public debt. Everybody knows that there is too much public debt. It’s a serious gaping wound which won’t go away and needs treating. But before that receives treatment the government needs to stimulate growth and restore confidence. It is for this reason the media is suddenly full of suggestions to pump money into developing the country’s infrastructure. This will create employment and pump more money into the economy.

Following the Great Depression in the US in the 1930s, the ‘New Deal’ was launched involving projects to build roads, dams and electric systems. The main purpose was to create new jobs and combat 25 per cent unemployment. While some economists would not agree, it was generally deemed a success.

The state of Eurozone and slowing growth in both Europe and the US have magnified the vulnerability of the world’s economy even further. And what does that mean here? Well, in the third quarter of 2011, the FTSE 100 index in the UK recorded its worst quarterly performance since 2002. It was also the fourth worst quarterly performance since its launch in 1984.

No matter what side of the politico-economic fence you sit on, these results are alarming. I believe the time has come to make the stimulation of growth the main thrust forward rather than reducing public debt at any cost.

Confidence is so important in addressing growth. Quite simply, lack of confidence inevitably leads to lack of growth – for example consumers “tightening their belts” and changing their spending habits. This is driven by worries about job security, fear of increased interest rates and the effect of 4.5 per cent inflation eroding spending power. This initially impacts on retail and leisure businesses but gradually passes along the food chain to wholesalers and trade service suppliers. And lack of confidence results in the scrapping of expansion plans.

Companies would normally turn to banks for support but the banks are still licking their own wounds from the recession and are not in great shape themselves. At a time when they are risk-averse, they are not going to look favourably on a company with a weak balance sheet. So, unless alternative forms of lending such as invoice finance or private investment are available to plug the financial gap, businesses potentially face failure.

The road to financial recovery is going to be fraught with challenges and the coming months will be both crucial and revealing in equal measure. Arguably, the biggest challenge will be for world leaders, in politics and banking, to look beyond reactive debt crisis solutions. If they can balance the value of investment and infrastructure against the headline-making growth of public debt, there is the potential for growth, restoration of confidence and achievable recovery. But it is a big ‘if’.

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