We seem to have arrived at the stage where things could be getting better in a global context or, then again, maybe not. Last week I read two news stories only hours apart - according to one, the world economy is still looking at meltdown. According to the other, recovery is on the way. The meltdown story was based on warnings from the International Monetary Fund (IMF), which cut its global economic forecasts on the basis that the US and Japan are struggling (although, let's face it, the Japanese economy has been struggling for about 10 years) and, according to IMF officials, the outlook for both remains grim. In fact, the IMF report was probably its gloomiest since the Asian currency crisis, and its upside depends almost entirely on a rebound in the US. The IMF's prediction was that the US economy would expand by 1.5 per cent this year - in sharp contrast to its forecast last autumn where it was predicting growth of 3.2 per cent for the year.
Despite its more hopeful stance on the Japanese economy (really just based on the new prime minister's promises to tackle the causes of the Japanese slump, including the mountain of bad debts held by the banks), the IMF knows that Japan won't be able to bail out the world any time soon, so everything depends on the US.
And, right on cue, last Friday's GDP report showed that the US economy grew twice as fast as people had expected for the first quarter of this year.
Consumer spending was up as Americans decided to take advantage of cheaper loans to buy the things they wanted just in case the real recession sets in.
Incomes were higher too. The Treasury Secretary, Mr Paul O'Neill, was elated and commented that the US was "wonderfully resilient". I'd say that Mr O'Neill is actually wonderfully relieved because a full-blown recession wouldn't look good on his CV.
You'd think that everyone would be as pleased as Mr O'Neill with the news, but interest rate watchers are concerned that the Federal Reserve won't cut rates again as soon as they'd hoped. And if the Fed doesn't cut rates, companies might not be encouraged to borrow for expansion or consumers won't rush out to buy - you know the circle of events by now!
Meanwhile, in Europe everyone is on the defensive. When issuing its report, the IMF was critical of the European approach to the global slowdown and its chief economist, Mr Michael Mussa, referred to the European Central Bank (ECB) as being part of the problem rather than part of the solution.
Enough to make Mr Wim Duisenberg dig in his heels even more? Much as he might ignore being lectured by Minister for Finance Mr McCreevy, being lectured by the IMF will really put him off his breakfast. However, this transatlantic finger-wagging has drawn the ECB people closer together in some uncharacteristic bonding and support. Mr Otmar Issing, the chief economist, pointed out that it would be wrong to expect the euro zone to replace the US as the world's engine of economic growth. (Given the current structures in Europe, I'd have thought that was pretty unlikely in any event!)
He also said that cutting interest rates would create more problems for Europe than it would solve because it would trigger an unsustainable level of growth.
Possibly, which is the irritating thing, but probably unlikely.
The ECB is still obsessed with its inflation target (maybe it's unfair of me to say "obsessed" since it is its performance benchmark) but, despite the fact that inflation will again be more than 2 per cent, it's really hard to see growth pushing out of control in Europe. Even in the Republic, the Central Bank is paring back its forecast, though that's not a bad thing, but it's in Germany that the real worry lies. They, too, have revised growth quite sharply downwards. So it's hard to see where all this pent-up demand is going to come from.
Interestingly, or strangely, depending on your viewpoint, the European Commission expects demand in the euro zone to be similar to last year, while also expecting world trade to slow down sharply. At the same time, the Commission is predicting that exports from Europe will increase. Unless there's a sudden surge of demand from the US or Japan, it's hard to know where those gains can be made. The markets are sitting on the fence while giving the ECB the benefit of the doubt by not smacking the euro around the head and sending it lower. Still, job losses in Europe continued last week, with Siemens, Scania and Moulinex all cutting back. So I guess the EU Commission isn't expecting those increased exports to come from electrical goods or trucks. Unilever also announced job cuts - 8,000 worldwide. Oh well, at least we're not in Argentina. Every year there's a Latin American wobble of some sort or another - and last week it was Argentina again. If everyone hadn't been so caught up in US-watching, the Argentinean wobble could have been much worse. The government cancelled a bond auction, which triggered concern that it was unable to service outstanding debt. Cue a sell-off of emerging market paper as people remembered all those debt crises of the past.
The word "panic" was used in some reports, which is always good for stirring it up a bit. In any event, Argentinean paper ended the week strongly because the country's economy minister, Mr Domingo Cavallo, proposed a debt swap exchanging maturing bonds for longer-dated paper. Of course the holders of maturing bonds might not actually want longer-dated paper. They might want to take the money and run, which would scupper the plans and trigger talks of default again. Right now holders of Argentinean debt are playing a wait-and-see game and, let's face it, anyone who's a trader in Latin American debt has been at the top and the bottom of the roller-coaster that is emerging market paper, so they should be used to a few sleepless nights. The whole world is in a wait-and-see environment right now. And it'll be a few more months before market players can count on untroubled slumber. By then, of course, there'll be a different crisis to worry about anyway.
