Soldiering on

The International Monetary Fund downgrades global growth. Investors pray for further stimulus. It’s the only hope. Except that it isn’t. The global economy is doing as well as can be expected — and doesn’t need a helping monetary hand.

Yes, recovery remains “weak” and there continue to be many “downside risks”, as the IMF says. That’s not surprising. But the simple truth is that the economy is growing and a double-dip recession has so far been averted.

It is Europe that is holding the world back. The IMF forecasts a 0.3 per cent euro zone contraction this year. That means it’s up to the United States and China to keep the world advancing. Despite all the doubts, they’re still doing it, growing two per cent and eight per cent, respectively, this year, the IMF estimates.

Full global recovery won’t come until Europe is repaired. But the bad news in the Euro zone is really good news. The big recessions expected in Italy and Spain, the third and fourth biggest of the Euro zone economies, reflect government austerity which, despite calls for growth, is essential. Spain, in particular, is showing the stomach for it. Its external deficit on current account is falling. Spain’s progress through pain means it is getting closer to living within its means.

Soaring global oil prices are another burden the global economy has had to bear — rises of 28 per cent in 2010 and 32 per cent in 2011. It’s hard to imagine how a frail world has withstood that. The IMF now forecasts a 2.1 per cent fall in oil prices this year and 7.5 per cent in 2013. The benefit can already be seen. The UK reported a surprise drop in inflation from 2.8 per cent to 2.4 per cent on July 17. The British consumer’s money will go further.

The global economy has put up with a lot — and still kept going. What it needs is continuing effort by Europe’s problem economies to tackle budget deficits and poor competitiveness. Lower oil prices would help — and may well come if policymakers, especially the US Federal Reserve, hold back from additional stimulus.