London: There is a growing worry for investors as they head towards the second half of the year — will governments' increased appetite for budget cutting knock the nascent global economic recovery off track?
The answer might come down to a somewhat discredited concept, the "decoupling" of economies that sees some driving forward while others lag.
That was what was supposed to happen as the subprime/financial crisis built, but it didn't.
Many investors have assumed for some time that while the debt crisis in Greece and mounting fiscal problems in other peripheral Eurozone countries is a serious matter, the long-term outlook for world economic recovery looks good.
Now, however, there is a rush by governments to get their accounts in order, a kind of synchronised austerity that threatens to crimp the ability of economies to spend their way towards growth.
This challenges many assumptions among investors, who have hung on to a belief that equities will recover from the current correction because of economic growth.
The latest to join the austerity movement is Germany, which unveiled a package to deliver savings of 11.2 billion euros ($13.48 billion, Dh49.5 billion) next year, lower this year's budget deficit, and increase savings to 19.1 billion euros in 2012, 24.7 billion euros in 2013 and 26.6 billion the following year
Britain, too, has begun cutting its budget, so far aiming to save £6 billion ($8.74 billion, Dh32.08 billion) this year.
The two moves prompted independent investment advisers Lombard Street Research to refer in a client note to an "Anglo-German stupidity shoot-out" — a veiled reference to past football matches between the two on-field rivals.
"Anglo-German fiscal policies virtually guarantee a fresh European recession, possibly a medium-term depression," strategist Charles Dumas wrote to his clients.
It is at this point that decoupling comes into view, the idea being that while Europe might struggle as a result of its debt/austerity tango, major economic engines such as China and the United States will carry on growing.
"In effect, the global economy has lost an engine with Europe," said Michael Dicks, head of research and strategist at Barclays Wealth. "It means you are still flying, but it is not as balanced. It is a trickier ride."
