One big part of the global economy is looking remarkably synchronized. GDP growth in 2008 is expected to be almost identical in the euro zone, the US and the UK. It’s the same story for inflation rates. And, growth and inflation are expected to decline in all three economies.
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But, this uniformity hasn’t reached the central banks. They seem to live in quite different worlds.
Start with growth. Goldman Sachs Group Inc. is calling for 1.4% in the UK this year and 1.5% in both the euro zone and the US. For next year, the bank’s forecasts are 0.9% for the UK, 1.3% for the euro zone and 1.1% for the US. Inflation is a similar story. The expected rates for 2008 are around 4%. The 2009 forecasts show more variety—from 1.9% in the UK to 3.2% in the US.
The three central banks are also expected to behave identically this week by holding their overnight interest rates. All three will say or hint that worries about growth and inflation are finely balanced.
But, there is a big difference. The policy rates show far more divergence than the economies. The US Federal Reserve is at 2%, the European Central Bank at 4.25% and the Bank of England at 5%.
The low US rate stands out. If anything, however, distinctive factors in the US point to higher, not lower, rates than in Europe. The high US current account deficit suggests excessive consumption. The US looks worse on two other harbingers of inflation—the government’s deficit and the currency’s strength, although the pound is also weak.
US monetary exceptionalism is easy to explain, although harder to justify. The Fed has long taken a devil-may-care approach to inflationary risks. After a half-decade of fretting about the risk of deflation, the US central bank is only now starting to worry about the reality of higher prices. Actual rate increases lie beyond the horizon.
The extended period of low US rates may be helping prevent or delay a full-blown recession. But, when the Western economies do desynchronize, it’s likely that the US will be the outlier—with durably higher inflation.