QE ‘staved off economic meltdown’

By SCOTT REID
Published on 08/04/2012 00:00

Think tank says fiscal stimulus has been successful and raises 2012 global growth forecast 0.3 points

MASS money printing by the world’s central banks has “saved the global economy from potential meltdown”, pushing one of Britain’s most influential think tanks to raise its growth forecasts today.

But the Centre for Economics and Business Research (CEBR) also warns of a number of clouds on the horizon, including political uncertainty in the Middle East and a further spike in the price of oil.

Publishing its latest “Global Prospects” report, the think tank revised up its 2012 global growth forecast from 2.5 per cent from 2.8 per cent. The United States is likely to be the fastest growing Western economy, it predicts.

The generally upbeat projections come in the wake of January’s downgrade by the International Monetary Fund (IMF).

Updating the forecasts in its autumn World Economic Outlook, the fund slashed its world growth forecast from 4.1 per cent to 3.3 per cent and said output in most major economies were “decelerating but not collapsing”.

Major central banks, including the Bank of England, have embarked on massive money printing programmes – so-called quantitative easing (QE) – in an effort to kick-start growth and stimulate bank lending. Analysts at the CEBR argue that the fiscal stimulus measures have propped up flagging economies and allowed the organisation to raise its forecasts.

However, it cautions that the printing of money has “added to speculative pressures” in commodity markets such as metals and oil.

Tim Ohlenberg, senior economist and the main author of today’s report, said: “There is a much more positive international economic tone. But we should remember that most of the emerging markets are slowing – it is the prospects for Western Europe which have stabilised and those for the US have improved.”

Douglas McWilliams, the CEBR’s chief executive, described inflation as the “fly in the ointment”.

He said: “Printing money has staved off the worst but the cost has been higher oil and commodity prices. These mean that the US is unlikely to engage in any more quantitative easing and may start quantitative tightening at some point next year.”

CEBR is forecasting that China – the world’s second-biggest economy – will grow by 7.4 per cent this year, down from 9.3 per cent in 2011. Beijing has been attempting its own fiscal tightening in order to cool inflationary pressures and address an import/export imbalance.

In contrast, the think tank believes that most of southern Europe will remain mired in “deep recession” this year. It is predicting a 1.2 per cent contraction in Italy and a 1.4 per cent decline in Spanish GDP.

The report comes on the eve of Wall Street traders returning to their desks after the Easter holiday break. The London Stock Exchange remains closed until Tuesday. Despite signs of global economic stability, investor confidence is likely to be rocked by weak employment data from the US.

News that payrolls rose far less than expected emerged on Friday afternoon when markets on both sides of the Atlantic were shut for the Good Friday break. US employers added 120,000 jobs last month compared with the 203,000 flagged by analysts.

It keeps the door open for further monetary policy support from the Federal Reserve, while in Britain conflicting economic indicators mean that further QE cannot be ruled out.