The global economy is divided at the moment into the good, the bad and the ugly. Two of the most populous nations can claim to be good. The US is growing and since business investment has taken off – an important factor delayed by Washington infighting over the Sequester and budget deficit – the economy looks like it is rebalancing nicely. And India saw its manufacturing output chalk up the 10th straight month of expansion in August.
China ranks among the bad after its vast factory sector almost contracted in August. Firms blamed slackening foreign and domestic demand, though the beginnings of a crisis triggered by debt-fuelled consumer and business spending should also be considered.
But chief among the uglies are the eurozone countries and Japan. Tokyo has suffered a slump since an increase in VAT to 8% earlier this year sparked a consumer spending strike. Output slumped more than 5% in the second quarter under the admittedly volatile annualised GDP measure.
The manufacturing activity survey for the 18-member eurozone struck a similarly discordant note. Markit's August manufacturing PMI came in at 50.7, above the 50 points that mark expansion but the lowest level in over a year and well below July's 51.8. France dragged down the average, as did the Netherlands and Italy.
Investors who have kept stock markets buoyant are betting on the European Central Bank (ECB) at least moving closer to quantitative easing to make credit even cheaper at its meeting on Thursday. Failing that, they expect Brussels to loosen the budget constraints on Paris and Rome, allowing them to invest and introduce structural reforms more painlessly (effectively giving them enough money to bribe reluctant or badly affected lobby groups).
No doubt there will be a bit of both and neither will be effective, not least because German finance minister Wolfgang Schäuble is against both initiatives. He said last week that the ECB had run out of ways to help the currency zone. Only governments can spur growth, which he said they must do without running excessive deficits. "Monetary policy can only buy time," he said.
So Europe must rely on the German fetish for expansionary fiscal contraction – the idea that once big-spending government gets out of the way it stops crowding out the private sector. It is a theory that may work for small economies surrounded by fast-growing neighbours. But countries such as France and Italy, or Britain, export to each other and so their cuts in investment and welfare spending drag each other down. It won't work there.
