Cover the brake

They may not exactly qualify as "green shoots of recovery" just yet, but there are plenty of signs that the global economy may soon stop getting worse. In both the US and the UK, life is starting to return to the housing market. Banks are reporting an improvement in profitability, which suggests they will become more willing to extend fresh credit. (In the UK, HSBC has announced a £1 billion pool of mortgage money for people with low down payments. However, the deal is only available to its "Premier" clients. Since it's a requirement for "Premier" status that the client has over £50,000 on deposit with the bank, it's a bit difficult to see there will be much take-up. Still, the very fact that they see some benefit in being seen bidding fior new business is itself a positive sign).

Away from the housing market, commodity prices are stirring, led by that old bellwether, copper. Oil prices look more likely to rise than to fall. The Baltic Dry index started moving higher a couple of months ago, though it's stalled again. Share prices have begun to increase as investors scent a turn in the economy. Even consumer inflation may not be as quiescent as most people have assumed, if the latest UK data are to be believed.

Against this background, policymakers will need to be careful. Apart from the ECB, which is hinting at further cuts, most of the major central banks already seem to be in a wait-and-see mode. The fiscal front may pose greater risks for the medium term. Many of the staggeringly expensive stimulus programmes announced over the past few months have yet to translate into any new spending. If the recession really is set to bottom out before the end of this year, there's a risk that a lot of this spending will come on stream at a time when growth is already getting back on track. This poses a clear inflationary risk. (The stable inflation expectations currently shown by index-linked and conventional bond yields imply that the markets do not yet see this as a severe threat. However, this may not be quite as comforting as it seems, since we are likely to see at least a few months of outright deflation before higher prices become the greater risk again).

Politicians are unlikely to rush to withdraw fiscal stimulus just because it no longer seems to be needed, especially in the UK, where the massively unpopular Brown government faces an election by mid-2010. This will place the burden of early adjustment on monetary policy. The big mistake made repeatedly by the Greenspan Fed was not in cutting rates when circumstances demanded (the tech wipeout, 9/11 and so on) but in finding excuses not to raise them again when the danger had passed. The stimulus provided to the global economy over the past year has been so extreme that delay in applying the brakes when the time comes could have very damaging consequences. Right now the central banks seem to have engaged the cruise control, but it would be nice to know that Messrs Bernanke, King et all still remember where the brake pedal is.