Growth risks, jobs funk beg for new policy tilt

LONDON — As western economies hit another pothole in their stuttering post-crisis recoveries, pressure to step up economic policy intervention to tackle entrenched unemployment may be building.

Global business surveys showing a second consecutive retreat in private sector growth last month — albeit from nine-month highs in December — have rekindled investor doubts about whether policy settings are adequate to protect recovery through 2013.

Few have lost sight of the fact that the country with the best growth performance so far, the United States, has some of the loosest policy settings. And the Federal Reserve makes no bones about its focus on joblessness. “The large shortfall of employment relative to its maximum level has imposed huge burdens on all too many Americans and represents a substantial social cost,” Fed Vice-Chairman Janet Yellen said on Monday, warning that “insufficiently forceful” action carried big risks.

Major central banks are flooring interest rates or printing money, or both, and are assumed in many areas to be the default safety net, and speculation that one or all of European, British and Japan central banks will ease policy further at meetings this week continues to bubble.

But gnawing doubts about central banks’ ability to do all the heavy lifting on their own are turning the focus back on to fiscal policy.

As a result, the highly politicized debate over how to cut spending to rein in bloated government debts without snuffing out the economic growth needed ultimately to reduce such borrowing has raged again over a sobering month.

A vote against austerity in Italy, Britain’s loss of its prized triple-A credit rating, and automatic budget cuts triggered in the United States on Friday have all amplified the risks of slashing budgets too deeply and too fast while economies are weak or even contracting.

Government fears that creditors will turn on them if they tilt back towards growth from austerity may also be overstated, some feel.

“People continue to under-appreciate the level of cohesion in policy circles and how much the interventionist case is coming together,” said Deutsche Bank economist Stuart Parkinson. “If they (governments) are being asked to look beyond austerity for a little bit and have a go at reviving growth, they’ll get the benefit of the doubt from investors.”

Mr. Parkinson said fiscal and money policy would increasingly be targeted at staving off an “unemployment crisis” worldwide. He said governments were hyper-aware of both the short-term electoral challenge and more serious threats to social stability from persistently high long-term and youth jobless rates.

International Labor Organization forecasts show there will be some 74.2 million 15-24 year olds unemployed in 2013, up more than 5% since the crisis started in 2007. — Reuters

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