austerians take on the keynesians
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
WILL the new Austerians or the old Keynesians win the public policy debate on economic growth going forward? The contrast between the two became evident last weekend at the G20 summit when the UK and the US moved in opposite directions. The new Austerians were led by the British chancellor George Osborne, who had championed a budget that both cut spending and raised taxes. On the opposite side of the policy spectrum was the US Treasury secretary Timothy Geithner who urged policymakers not “step back too quickly on the hope that it’s over”.
The new Austerians argue that a sound fiscal policy will create confidence among investors and will calm capital markets, spurring economic growth. So far, the currency markets have agreed with that assessment. The pound has outperformed the euro and it has held up well against the dollar since the Budget, rising above the psychologically important $1.5000 level.
However, I have my doubts that the Osborne plan will work. The latest data from the G4 suggests that absent government stimulus consumer demand is practically non-existent. In the US, demand for housing has collapsed completely after a favourable tax credit expired in April. In Europe, demand for automobiles has fallen sharply after the government car scrappage schemes have been phased out. At present, consumers in the advanced industrialised economies appear willing to spend money only on small ticket items such as movies or restaurants while shunning more expensive durable goods. Given this, it is difficult to imagine how private demand can offset the decline in public spending. The fragile recovery in the UK economy could tip back into a recession as a vicious combination of higher taxes and less stimulus sharply curtails activity.
For the FX market, the debate means that the focus has shifted back to microeconomic data rather than the macroeconomic themes that have dominated for several months. As the year progresses, FX traders will once again begin paying attention to the fundamentals of the economic calendar to ascertain which approach is winning.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected]