Global Irregularities

While the Europeans and Americans maintain a loose monetary policy, with low interest rates and increased money in the market, Chinese officials have taken the lead and are beginning the post-crisis adjustment. If no unexpected surprises occur, the Chinese economy will be advancing towards a return to normal growth, reinforcing its position among the largest powers as both producer and exporter. China is already number one in exports, remaining ahead of Germany this past year. Soon, it may take Japan’s position as the second-largest economy in the world. In order for this to happen, nonetheless, officials will have to control real estate bubble and avoid an accumulation of inflationary pressures. In the U.S. and Europe, the directors of the central banks await on surer signs of firm economic growth in order to start phasing out the monetary stimulus conceded in the final quarter of 2008.

The European Central Bank announced that it would maintain an interest rate of 1 percent. President of the ECB Jean-Claude Trichet reaffirmed the intention of gradually phasing out economic stimulus measures. Credit continues to be weak, and inflation is expected to remain moderate.

The euro-zone economy has maintained a steady growth in the fourth

quarter of last year, but the recovery in 2009 was sustained by temporary factors. In other words: it’s too early to break down the anti-crisis scheme. New data from the German economy, the largest in Europe, could have been used as the illustration: it contracted 5 percent in 2009, while exportations decreased by 14.7 percent from the previous year. The best news was an unaltered unemployment rate of 37,000.

The public budget deficit reached 3.2 percent of the GDP. When the country is in better condition, the government will have to make severe adjustments in public accounts. This will most likely limit the rate of growth for a year or more. Before any changes can be made, it will first be necessary to be out of recession. The improvement observed in some European economies in the third quarter appears to have lost some steam. Many economists are showing themselves to be less confident in the recuperation then they were some months ago.

Also, in the U.S., there are no prospects of a raise in the interest rate. On Wednesday, the Federal Reserve divulged the Beige Book, a summary of the economy published eight times per year. According to the report, the improvements continued to spread throughout the end of the year through the country, but business remained at a modest level. Christmas sales were the highest since 2008, but much inferior to sales in 2007. In addition, loan demand continues to decline. According to information given by the Department of Commerce, retail sales in December fell 0.3 percent. The market forecast had predicted a 0.5 percent increase. According to the Department of Labor, the request for unemployment benefits has increased in the past week by 11,000, despite the expected reduction of 4,000.

With this scenario, it will be difficult to predict an interest rate raise in the United States in the coming months. Fiscal policy will continue to be expansionary because the government will have to maintain the stimulus activated in businesses. Meanwhile, the government’s bills will continue to accumulate large deficits and this will become more prolonged and difficult to adjust.

Last week, China’s central bank announced three measures to limit credit. It increased the interest of three month bill, raised the yield for the one year bill, and announced its intention of raising the bank reserve requirement by Monday. In December, urban property prices rose at a rate equivalent to 7.8 percent per year in 70 large and medium-sized cities in further confirmation of the overheating of the home market. These officials demonstrate a serious proposition to correct the effects of expansionist politics adopted at the start of the crisis. If they act with firmness and at the right time, eliminating excesses and the economy could grow with vigor in the coming years, consolidating itself as a global locomotive.