Economic Overview After A Tough Week: Earthquakes, Oil and Austerity

Economists surveyed by Bloomberg are pessimistic. There is disagreement on the lasting impact of the Japanese earthquake (some investors are saying Japan presents the greatest buying opportunity of the decade), of oil price increases tied to Middle East unrest (some say this is transitory, others not), but little dispute about the effects of government austerity during periods of economic malaise, "Austerity has never worked."

Bloomberg News provides the summary:

"The global economic recovery may be threatened by an array of “powerful shocks” including Japan’s record earthquake and Europe’s sovereign debt crisis, said Stephen Roach, nonexecutive chairman of Morgan Stanley (MS) Asia.

The impact of Japan’s magnitude-9 earthquake, together with the euro-region’s funding problems, turmoil in the Middle East, and a jump in oil prices are “worrisome” as the global economy’s rebound from the recession of 2008 and 2009 remains weak, Roach said at a conference in Beijing today.

“When you have a weak recovery, you don’t have a cushion that allows you to be able to withstand shocks,” Roach said. “Right now we have a lot of shocks. We are too optimistic on global growth.”

Global equities lost about $1 trillion of market value this week and the yen touched a post-World War II high amid concern the March 11 temblor and tsunami and the nuclear crisis they triggered will hurt Japan’s growth. Crude oil reached a 29-month high of $106.95 a barrel in New York on March 7, as unrest that has already unseated rulers in Tunisia and Egypt spread to Bahrain and Libya.

Roach is more pessimistic than economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co., who said the world economy will bear up in the face of the twin blows from Japan and oil. Goldman Sachs forecasts expansion of 4.8 percent this year, while JPMorgan predicts 4.4 percent, surpassing the 3.4 percent average of the past two decades.

Continued Growth
The world economy will continue to grow even as Japan’s earthquake causes “modest supply disruptions,” Citigroup Inc.’s chief U.S. equity strategist, Tobias Levkovich, said in a Bloomberg Television interview yesterday.

More stimulus may be needed to spur a global recovery, Joseph Stiglitz, the Nobel Prize-winning economist, said in Beijing today. The U.S. Federal Reserve has joined the European Central Bank in holding interest rates unchanged after adding to its bond purchase plan last year to bolster growth.

“Austerity has never worked and won’t work in the current context,” Stiglitz said. “Unfortunately, many of the countries in Europe and elsewhere are focusing on austerity which means the prognosis in many of these countries and therefore the global economy on that side is rather pessimistic.”

While austerity won’t help the global recovery, stimulus programs including “zero” interest rates and “open-ended” budget deficits may not work either, Roach said.

“To do it with artificial stimulus, you have this image of a patient laying in a recovery room in a hospital,” Roach said. “Whenever you withdraw the medicine the patient goes back into a coma. That’s a real risk for the global economy today.”