May 2, 2008 | posted by Michael Baxter in global economy |

On the whole it was pretty upbeat.       Sure, there is a financial crisis, but in its latest forecasts for the global economy, the National Institute of Economic and Social Research (NIESR) projected economic growth for the global economy of 4.2 per cent this year, and 4.3 per cent next.

As for Uncle Sam – it reckons the US will expand by 1.3 per cent this year and then 1.7 per cent.   Actually, that will make a pretty sharp recovery for the US. The latest official data, out earlier this week, put US economic growth at an annualised rate of 0.6 per cent in the first quarter.

As you know, George Dubya and US Treasury secretary Harry Paulson have been busy of late, licking down 117 million envelopes and stamps and then signing all those cheques – if only they had a rubber stamp.  But the fiscal stimulus, combined with all those rates cuts and Ben Bernanke’s helicopter drop of money into the US banking system, should have an effect soon, which is why the economic pickup is expected.

But there was a note of caution. We have heard this note played before – but then again, not quite.  Because, yesterday, NIESR waved that inflation warning flat yesterday – but this time it came with a twist.

US inflation, it forecast, will hit 4.3 per cent this year – and even next year will probably come in at 2.9 per cent.

“The stagflationary mix,” say NIESR, “will be especially acute in the United States, whose GDP will grow only by 1.3 per cent this year while prices will rise by 4.3 percent.”

There are no prizes for guessing the cause for the rise in inflation in the short-term – it’s the rising price of oil and food.

But, Ray Barrell at NIESR said yesterday that the real cause of the inflationary pressure was the lax monetary conditions seen in the US earlier this decade and in the build up to the credit crisis.

But how can lax US monetary policy have led to the higher price of oil – surely this is an occasion when inflation is cost–push, which is why many economists argue the Fed is right to slash interest rates?

Well, maybe not.  As OPEC pointed out earlier this week, the real factor behind the rising price of oil has been the falling dollar. 

And why is the dollar falling?    Answer, because the excess consumer spending in the build up to the credit crunch led to the massive US deficit in the current account.  The falling dollar may well go some way to correcting this, but the US will then import inflation.

In other words – the current surge in inflation in the US is, once again, a monetary phenomenon.  It is just that on this occasion inflation has exerted itself in a somewhat roundabout way.

Before the credit crisis, many economists argued that the global economy was out of balance.  China, Japan and Germany were exporting too much and not importing enough; in the US and UK it was the other way round.

Curiously, the credit crunch has in a way been exactly what the doctor ordered, because lower rates in the US and expectations for lower rates in the UK have caused the dollar and the pound to slide.

But remember Harold Wilson and his pound in the pocket.  Contrary to what he said, a cheaper pound relative to other currencies does affect the pound in your pocket or purse.  Inflation can set in as a result

In the US, politicians have been screaming for China to allow the yuan to appreciate.  Yet if this does happen, China will move from being an exporter of deflation to an exporter of inflation. 

We have just enjoyed many years of what Lord Eddie George, the former governor of the Bank of England called NICE – Non-inflationary Consistently Expansionary – but that came with a downside – a global economy out of balance, with savings rates in some parts of the world too high, and too low elsewhere. 

It is possible that that problem of this lack of balance is now, at last, being fixed – but the price we will pay may be an end to NICE –  maybe we are about to see Corrections Recessions And Payback, instead.