Global slowdown or false alarm?

The global economy continues to grow but uncertainty has gripped observers about the sustainability of growth in the world's three biggest markets: the United States, Europe, and China. In the United States, growth has been disappointing and the job market appears to be going nowhere. In Europe, the sovereign debt crisis and the policy response have conspired to alarm markets. Finally, China's tightening of monetary policy and efforts to cool an overheated property market have raised fears that growth will slow. In this issue of the quarterly Global Economic Outlook, our economists peruse the economic environment and place these events in perspective. In our topical article, I highlight the differences in opinion about the role of fiscal policy amidst economic recovery. While Europeans argue for quickly reducing deficits lest financial markets react negatively to government debt, American policymakers suggest that deficit reduction can wait a little while longer. I offer some rules of thumb as to when deficit reduction works and when it does not. Elisabeth Denison begins her quarterly outlook on the Eurozone by stating that "the recovery in Europe is on track." Given the recent turmoil in Europe's financial markets, this is a welcome point of view. But it needn't be surprising. The reality, as Elisabeth points out, is that many indicators are demonstrating a robust recovery. While some analysts fear that Europe's fiscal tightening will hurt growth, Elisabeth states that "this is the right thing to do." She makes the case that fiscal consolidation will better position Europe for sustainable growth. In my analysis of the U.S. economy, I point to a number of reasons why the economic recovery has so far been disappointing. I also point to reasons why the recovery will likely be sustained, although at a slower pace than previously thought. Furthermore, I tackle the issue of inflation, specifically why inflation is much less of an issue for the U.S. economy than previously expected.download