Economic optimism is now official. The year ahead could be “a very good one for the American economy,” Ben Bernanke, the chairman of the US Federal Reserve, declared on Tuesday. If he turns out to be right, these words could probably be applied to the world economy as a whole.
Since Bernanke, even more than other central bankers, has spent the past four years warning of perils such as the “fiscal cliff” and the dismal condition of the US labor market, the statement, delivered in the carefully worded peroration of a speech to the prestigious Economic Club of New York, marks an important turning point.
Not because Bernanke has a crystal ball that offers him economic clairvoyance, but because his views have an enormous impact on business and financial sentiment around the world, and sentiment — especially about government policies — is the biggest problem for the world economy today.
In terms of objective economic and financial conditions, the end of this year looks like a turning point in the slow recovery from the global financial crisis. Outside the eurozone, which now accounts for just 17 percent of global output and will shrink to just 9 percent by 2060 according to the Organisation for Economic Co-operation and Development, economic statistics are clearly improving.
Unemployment, though still high, is steadily falling. Banks are now adequately capitalized. Property prices have stabilized, stock markets are rising and credit conditions have returned more or less to normal.
For much of this year, the main obstacle to hiring and investment decisions, according to many business surveys, has been uncertainty about politics and monetary policy. That uncertainty is almost over.
This may sound preposterous. After all, businesses and financiers have been obsessed all year with the eurozone crisis, speculation about Fed monetary policy, the US presidential election or China’s surprisingly chaotic leadership transition — and now the prospect that the US will fall off a fiscal cliff, dragging down the whole world economy — but that is the point.
Political uncertainties have been resolved or dramatically improved in all the most important economies. Yet business sentiment is so negative that almost nobody believes this.
Consider what is happening around the world — with the glaring exception of the Middle East, where war and political chaos is unfortunately quite normal.
China has belatedly anointed its new leadership, which should end the paralysis in economic policy and ensure that the country’s gradual adjustment to slower growth does not deteriorate into an economic collapse.
In Europe, the crisis has certainly not ended, but German Chancellor Angela Merkel’s decision to back unlimited bailouts and to keep Greece within the eurozone, essentially guarantees that the euro will not disintegrate, nor the banking system suffer a Lehman-style meltdown. At least until the German elections in October next year.
Best of all, the uncertainty about US politics and monetary policy, which have preoccupied businesses and investors this year to the exclusion of almost all other issues, is about to disappear.
Bernanke made clear on Tuesday that his optimism about the economic outlook depended entirely on the assumption that the US Congress would ultimately back away from suicidal legislation that would deliberately push the economy over a fiscal cliff on Jan. 1. The bad news is that a plausible deal to avert this self-inflicted catastrophe has not yet been outlined. Fear of another Lehman-style financial crisis therefore quite reasonably restrains business decisions around the world.