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Not a great beginning of the week for the world economy. The week has started with more rumors about a Greek default, doubts on the French banks, weakness of the Euro and sharp falls in European stock markets during the first half of the day. Another recession? The beginning of a depression? We are going through a period of fatigue as markets, investors and companies seem to be waiting for good news coming from any of the advanced economies. But we only get bad news. Governments and central banks try to cheer us up: President Obama with a plan to create jobs, the ECB buying government bonds from Spain and Italy and keeping rates under control, but none of this is enough, we need much more to reverse the current decline in confidence.

We have lived under the hope that as long as the news were not too bad, that we would over time build the necessary confidence to generate healthy growth. As long as we can keep going without Greece defaulting, with US fiscal policy on automatic pilot even if there is no exit plan, with the unemployment rate not going up in the US (even if it stayed high), we could find the necessary arguments to start spending and investing again. Now we know that this is not going to work. As time passes confidence gets weaker and we enter a vicious cycle of expectations causing behavior that feeds into our pessimism. Fundamentals have not changed much but we are waiting for a signal that although things are not that great they are not that bad either and in the absence of that signal, we assume the worst.
It is not easy to see what positive signal we will get over the next weeks. I cannot imagine any GDP, unemployment, consumption, earnings release that will be good enough to reverse the current mood. Will the approval of the Obama jobs plan by congress be good enough? I doubt it. Will a new statement by the Euro countries that no government will be allowed to default do the trick? I do not think so. We need a surprise, something that is not part of any of the current scenarios we are contemplating. And whatever that surprise is, it needs to do something substantial to stimulate demand in the short term. Yes, structural reforms will always be welcome but there is the need for actions in the short term and promises of a better distant future will not be enough. What I would like to see is a strong statement by economic authorities among all advanced economies that they understand the situation, that they clearly share the same priorities, that they all see that we are in the same boat and that austerity for the sake of austerity is not the solution to the current crisis.
But such an announcement requires a lot of political consensus within countries and internationally, which is not what we have seen in the last days. And it also requires more clarity from central banks in their communications. While Bernanke and Trichet have done lots of great things to avoid a deeper recession, their most recent communications (e.g. Trichet responding to a question about the ECB and Germany) reveals too much the tension in their decision making process and not enough their commitment to find a solution.
Source: Waiting For Bad News On The Edge Of Another Crisis