OECD GDP growth. The OECD published an interesting chart a couple of week ago showing the breakdown of growth within the OECD area in the 3rd quarter of last year. Given all the doom and gloom about the outlook, these figures are actually quite encouraging. They show overall growth of 0.6% in the quarter (annualised 2.4%) with positive contributions from consumption,investment and net trade with the only detractor being a decline in inventories. This was after growth of 0.5% in all of the first half. So why the doom and gloom? The best explanation would seem to be the threat of deflation. Whilst real GDP growth looks just about acceptable, nominal growth does not and for this we have to thank Japan and Europe. Japan is struggling to scape deflation despite an aggressive monetary expansion but Europe still looks as if it is slowly but surely sinking into deflation. In the short run, the picture is reasonably encouraging. The Federal Reserve is moderately positive about the outlook for the American economy and the UK economy should do sufficiently well to boost the current government in advance of the election. The outlook for Asia is also positive helped by the fall in the oil price which should make life easier for Japan. Even Europe is showing signs of recovery as indicated by the German IFO survey and other monthly data. The longer term problem for Europe is that nominal GDP growth is unlikely to be sufficient for the periphery countries to escape the debt trap, which is a perfectly rational explanation for the collapse in their bond yields. They are all politically committed to remain within the euro area despite continuing deflation and very low economic growth. But in the meantime, the positive trend of the 3rd quarter of 2014 will extend into this year. THe fall in the oil price will boost real incomes throughout the OECD and must lead to stronger consumption. Whether that boost will be sufficient to persuade some central banks to raise rates towards the end of the year will be one of the imponderables of the second half of 2015.

World industrial and export trends. One thing not much discussed in the economics blogosphere is the aenaemic growth in world trade. This has been about 3%pa over the last two years as opposed to 15%pa in the years before the financial crisis. It is particularly noticeable for developing countries where there has been a dramatic decline in export numbers but also true of the OECD countries. There are many explanations, the end of out-sourcing, the collapse in commodities etc, trade barriers and so on. But whatever the reason, it all feels as if something has changed in the world economic order. Something similar has happened to industrial production but it is not so pronounced, and is more a reflection of weakish overall economic growth. Here the noticeable point is that emerging market industrial production growth has fallen to that of the OECD, whereas it used to be more than twice as strong (only partly due to China)

Should Greece leave the euro? The answer is probably yes. A Grexit is is almost universally portrayed as a disaster but to whom? Would it be a disaster for the Greek people? Possibly but possibly not; it depends on how Greece runs its affairs post a Grexit. In the immediate aftermath of a Grexit, there would be banking chaos as Greek banks went under with deposit outflows and assets overwhelmed by euro denominated debt. But is this a disaster - who cares for the Greek banks? The Greek people would benefit almost immediately from the sharply realigned exchange rate, an immediate external devaluation rather than the grinding and painfully slow internal devaluation. The one valid argument against a Grexit is that the internal devaluation is forcing a massive restructuring on the Greek economy turning it into something close to a modern competitive one on a par with the rest of Europe. A Grexit would stop that process which would be a shame. There is good evidence that the Greek economy is benefitting from its restructuring and the economy is growing again albeit after a 25% contraction. But the problem is that the debt burden is still rising. The economy is not growing fast enough to allow that burden to fall and the blame for that is Germany. If Germany wants Southern Europe to restructure, it must pursue a domestic agenda that will allow those economies to grow fast enough to repay their debt, and that means inflation. Inflation within Germany would allow the readjustment between German prices and South European prices to happen much more quickly than it is currently. Driving down the value of the euro does not help; that principally helps German exporters and does not affect the relative prices between Germany and her fellow euro members. Other arguments against a Grexit are specious, and are mainly to do with protecting European banks. When European politicians argue that a Grexit would be disastrous, it is not the Greek people they are thinking off but rather it is the impact on European banks that concerns them, who would be forced to write off Greek debt and bankrupt themselves in the process. We see a Japanese scenario here from the early 1990s; do whatever to protect the banks and avoid an extremely painful but necessary restructuring. The sad thing about the whole mess is that the extremist political parties who are benefitting from it are probably right.