World economy improving
- Market watch
28 November 2012|
Contrary to the earlier dire mood and the fears often expressed in the first half of this year, conditions in the world economy have not got worse and the outlook for next year may even be improving.
Until midyear, many investors were betting that Greece would be forced to leave the eurozone, with unpredictable consequences for the region and its trading partners. Those fears have diminished, and the EU/IMF announcement this week of revised and less onerous loan terms for Greece should continue to bolster confidence.
IMF MD Christine Lagarde welcomed the initiative, which, she said, builds on the efforts by the Greek government to carry forward its fiscal and structural reform agenda. The Eurogroup (of EU finance ministers) said it was confident it would bring Greece's public debt back on a sustainable path throughout this and the next decade and would facilitate a gradual return to market financing.
The euro region is still stuck with high unemployment and negative or marginal growth, but the recent progress is a lot better than rushing towards an uncontrolled "Grexit". Rising confidence can be seen in the bond markets, as shown by sharp declines in yields on 10-year Greek, Spanish, Portuguese, Italian and Irish government bonds since June.
The big worry now for markets and the economic outlook is the so-called fiscal cliff, which could cause a downturn or recession in the US if its politicians fail to agree on changes to legislated spending cuts and tax increases by year-end. If there is a favourable agreement, market sentiment and economic conditions should keep improving, at least if Federal Reserve chairman Ben Bernanke is correct. He said last week that co-operation and creativity to deliver fiscal clarity, including a plan for resolving the longer-term budgetary issues without harming the recovery, could help make the new year a "very good one" for the US economy.