Monday, January 19, 2009

Economist: China and Germany to take the lead


Manufacturing is highly cyclical, falling first and fast in a downturn. Firms are quick to scale back capital spending and consumers skip new cars rather than scrimp on food or healthcare. A rapid rundown in inventories and temporary distortions in credit markets (see article) have not helped. The collapse of trade finance made it all but impossible for many producers to shift their goods abroad. The plunge in trade flows is partly a result of tumbling commodity prices.

Fiscal stimulus packages that seemed sufficient two months ago may be too small, and too slow to take effect. Much of the infrastructure spending in the package that China announced in November will not kick in until later this year. This week’s decision by Germany’s government to add a second €50 billion ($66 billion) stimulus package is a step forward, though at barely more than 1% of GDP it is still far too small (see article). For the time being, the biggest and quickest fiscal boost is likely to come from America, as the Obama team seeks speedy passage of an $800 billion package of tax cuts and spending. That sort of money may put a brake on the global industrial collapse, but it will not set the world economy on course for a sustainable recovery. Others still need to do far more.


With Germany stimulating the Euro economies and China stimulating the Asian economies, perhaps the Great Recession will end soon enough.

Economist: China and Germany to take the lead

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