A pause we need

Global economy: Economists’ new catchphrase is “soft patch”. It’s for real. Global economic data is suddenly weaker. The fear is of a renewed economic downturn, characterised by another US slump or a Chinese hard landing.

But the current sogginess is more likely to be a pause — probably a necessary, inflation-curbing hiatus — than a harbinger of collapse. The tempting mistake would be to overreact with more stimulus, causing commodity prices and inflation to rip.

Softness is all around. US first-quarter growth of 1.8 per cent was disappointing. Regional surveys, such as that by the Philadelphia Fed, have pointed to markedly weaker May growth.

The euro zone had been solid, except in its shattered periphery, but a May manufacturing index is well down, from 58 to 54.8. That number looks good compared with China, long the bastion of high global growth.

The preliminary HSBC manufacturing index for May dropped to a 10-month low of just 51.1 — not far above the 50 that separates growth from contraction.

Reasons for the slowdown are plentiful. Global recovery has been rapid and some slowing may have been inevitable.

Crude oil prices above $100 per barrel are at recession-inducing levels and have hurt consumers’ spending power. Natural disaster has exacerbated Japan's slowdown and disrupted global supply chains. Policy has been tightened in fast-growing economies such as China, India and Brazil.

It would not take much for investors to panic and take a lot of money off the table. That may be what needs to happen.

Oil and other commodity prices may need to fall more in order to ease the burden on consumers and reduce inflation pressures in emerging economies. The world is still bifurcated. India’s growth has just slowed — but to 7.8 per cent, quadruple the US pace. Money printing in the West has bolstered weak economies but supercharged global financial assets and commodity prices.

That is why the least desirable response to the soft patch would be QE3 — a third round of US quantitative easing.

The inevitable result would be a tumbling dollar, soaring commodity prices, more global inflation and higher interest rates in emerging economies. Patience is the best policy.