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Tough calls after bungee jump recovery

First published: Financial Times, 25/08/2010

Financial markets were jolted this week by the 27 per cent fall in existing US home sales in July to levels last seen almost 20 years ago. Although a drop was expected, a more ominous decline in home prices is looming again, along with more pronounced weakness in aggregate final demand. The US may be growing, but by barely more than 1 per cent per annum. With Europe and Japan little better, it now looks as though the bungee-jump economic recovery from last year’s abyss has lost its momentum. Against this background, the policy debate about how to escape from the debt crisis is about to become increasingly controversial. The US congressional election campaign will focus on whether to allow the Bush tax cuts for upper income earners to lapse, unprecedented UK public spending cuts will be grafted on to the bones of the government’s austerity plan and EU nations with sovereign debt woes are likely to face new turbulence…..more