Dorothy (of Wizard of Oz fame) is soon to land back in Kansas. That’s the relieved impression most commentators appeared to give on Friday when US data showed that the world’s largest economy only contracted an annualized 1% in the last quarter—much less than the 6.4% the quarter before. Yet the world is far from emerging from the Great Recession’s tornado.
Japan, the world’s second largest economy, announced record deflation the same day. And China appears to be struggling with a financial bubble as US consumption —so far the driver of China’s growth—fell by 1.2% last quarter.
The biggest dangers still come from the US. The monetary expansion meant to combat the slowdown may well mean a replay of the last decade, when cheap money flooded the globe. And though Federal Reserve chairman Ben Bernanke says he knows how to suck out excess liquidity, he still hasn’t said when.
So we had better still hold on to our hats. We won’t return to Kansas by simply clicking our heels.