CHINA’S RATE of economic expansion has accelerated again, despite efforts to curb inflation through higher interest rates and an appreciating currency. The country’s manufacturing sector grew at the fastest pace in six months in October and economic growth is forecast to reach 10 per cent this year. This buoyant performance stands in stark contrast to the stagnant state of the major economies of the developed world.
In the US, the country’s central bank – the Federal Reserve – is again expected to resort to quantitative easing tomorrow, via large-scale purchases of government bonds, in an effort to boost demand and raise economic activity. Japan’s central bank is also set to take similar steps. And the Bank of England may follow suit on Thursday.
China’s economic problems are much less acute: there are some worries about rising inflation and some fears that its economy is overheating as property prices soar and exports slow in the face of weakening global demand. But in the developed world – and the US in particular – the fear is more of deflation than of inflation in a depressed economy marked by low growth and rising unemployment. The most pressing concern there is to avoid a double-dip recession.
In the circumstances, the Fed has little choice but to try to revive the US economy using unconventional and controversial monetary policy means, through a second round of quantitative easing. But for Fed chairman Ben Bernanke, the risks and rewards of such a move remain finely balanced.
The risks are that the use of newly printed money to buy government bonds could raise inflation, make it harder to control later and require much higher interest rates to do so. There is also some concern outside the US that a second programme of quantitative easing, which is designed to lower long-term interest rates in order to stimulate domestic demand, could depress the dollar. That would make US goods more competitive in world markets and make it harder for others – including Irish exporters – to compete. It would also raise fears of protectionism which would be damaging to world trade.
By injecting extra liquidity into the economy, the Fed would hope to raise consumer demand. But it would be doing so at a time when consumers seem more intent on reducing their debt than on increasing their personal spending. For Mr Bernanke, a second round of quantitative easing remains a necessary but very calculated gamble.