Current Global Imbalances: A supply side point of view (I)
There is a lot of attention to the current global economy imbalances, and its expected adjustment effect. It is clear that sooner or later, such adjustment will take place. The question is how; either soft or hard adjustment path, and whether it will impact severely the global economy..
I do believe that too much emphasis on the demand side of the adjustment, makes the analysis biased than otherwise would be, whether supply side variables are also taking into account. Let me explain a bit further this point with some available data.
a.- Recent revisited report from the United States Labor department for the first quarter of 2006, has indicated that productivity is increasing at a very strong pace:3.9% in Business sector,3,7 % in Non farm sector,3,8 in manufacturing sector and 3,5 % in durable goods manufacturing sector. These numbers indicates that productivity growth ,which has been regular since 1995 ,has helped to neutralizing inflationary pressures coming from oil prices increases , such as the Fed response ,while keeping inflation on line, does not risk too much the growth expectations. As long as Productivity continues its increasing pace, very much of the Fed approach (the unlikely economics recession scenario, coupled with middle range interest rate increases ), might be correct , and the probability of a recession turns out to be lower than expected.
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