The IMF has slashed its growth forecasts again for the Euro area, and for the UK. The latest UK GDP figures showed an economy slipping back a little in the last quarter of 2011. Many now think 2012 will also be slow going, whilst most forecast a recession in the Euro area this year.
 

This has not phased equity markets so far in 2012. They like the low interest rates, the money printing schedules of the UK and the large credit lines suddenly made available by the European Central Bank. The markets are more relaxed, taking news of difficult conditions in the real economy in their stride. After all, they argue, it just means interest rates staying lower for longer, and more monetary easing.

 
The US and UK authorities have used a variety of policies to try to promote growth. They have adopted ultra low interest rates. The US has just announced that these are likely to last until 2014. The UK has also suggested low rates are here for longer. They have undertaken quantitative easing to inject more money into the system, and to keep long government borrowing rates low. Both countries have run large public sector deficits. For all the talk about spending cuts, the UK in particular has pressed on record levels of public spending. They have not spared the much favoured “Keynsian stimulus”, deficit financed public spending. The UK Coalition government reduced the inherited proposed cuts to capital spending, and is now seeking to put together larger capital projects which can be partly or wholly privately financed as an additional stimulus. It is seeking to pump prime the housing market.

 
The Euroland area has done less until recently. They kept their rates a little higher, and even put them up before coming more into line by lowering them again. They held off quantitative easing, but have recently injected large sums into the banking system from the Central Bank to replace liquidity lost by a freezing of the inert bank market. The ECB has bought some sovereign bonds to try to stem rises in long term interest rates in the weaker countries of the zone. Euro countries have largely spent and borrowed more than the limits set out as part of their common budgetary discipline. Germany recorded a reasonable growth rate for much of last year, but the prognosis is now for weaker growth or declines in output across the currency area.

 
Investors are going to have to get used to slow growth or no growth in many parts of the west.  Japan after her large credit bubble in 1990 settled down to a long period of ultra low interest rates, big increases in debt and slow growth. In Japan’s case the monetary laxity did not trigger worrying inflation. Indeed the economy often hovered on the edge of deflation. The equity market never recovered the peaks achieved in the bubble, though it has enjoyed some good bull runs within the pattern of being well below past highs.

 
The US is the nearest to getting some momentum. This is probably owing to the speed of its adjustment to the banks and the sharp contraction in property values, getting a lot of the bad news out of the way early. It also owes a lot to the strong enterprising spirit visible in a good rate of company formation and the application of new technology to markets. The Euro area still has not resolved its currency problems, and still has a lot of work to do to strengthen banks so they can support more lending again. Meanwhile, in the emerging market world, things look a lot more promising.