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Recession Ghost:GLOBAL REVIVAL UNCERTAIN IN 2010, by Dr P K Vasudeva, 1 February 2010 Print E-mail

Events & Issues

New Delhi, 1 February 2010


Recession Ghost


GLOBAL REVIVAL UNCERTAIN IN 2010

 

By Dr P K Vasudeva

 

The world economy may not emerge out of the crisis in 2010 due to "bubbles" created by the huge injection of money used to keep the financial system operating, the World Trade Organisation (WTO) Director General Pascal Lamy had said recently on French radio on the issue. You have to be realistic, it is not guaranteed, was his advice.

 

“There is no doubt we have reached the bottom of the pool but the speed at which we are coming up again is not clear. In flooding the economic and financial system with public money we have also created bubbles which will have to be absorbed," was his explanation to the France Culture radio.

 

Governments around the world have spent trillions of dollars over the past 18 months avoiding the collapse of the financial system and then trying to claw away from the recession. The dynamism of the emerging economic powers -- China, Brazil, India and South Africa – has been highlighted in avoiding the worst of the crisis. These are the more dynamic, better run, less indebted countries, which are from a certain point of view better run than the western economies.

 

Airing positive views on recovery, the International Monetary Fund (IMF) feels that the global economy is slowly starting to pull out of its deepest recession since World War II but the recovery will be sluggish and policies need to remain supportive. In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4 per cent in 2009, a touch steeper than the 1.3 per cent decline it projected in April. However, it now sees the world economic growth picking up to 2.5 per cent in 2010, compared to an April 2009 projection of 1.9 per cent.

 

The IMF chief economist Olivier Blanchard maintained that forces dragging down the economy were easing in intensity but those pushing it up were still weak, despite heavy government spending and central bank lending. This has led the IMF to predict that while the world economy is still in recession, the recovery is coming, but it is likely to be a weak recovery. Accordingly, financial conditions had improved more than expected as governments have pumped huge amounts of money into their economies, and warned that withdrawing supportive fiscal and monetary policies prematurely would hurt the recovery.

 

The IMF's Monetary and Capital Markets Department has noted that Although exiting now would be premature, it's fundamental that they devise credible plans that map where they are going in the medium-term and how they are going to get there.  It has warned against complacency and said there was a danger of a setback if financial markets got too far ahead of economic recovery. Still, unprecedented policy intervention had reduced the risk of a systemic collapse.

 

The IMF said while the world's advanced economies are expected to recover modestly next year, growth will remain below potential until later in 2010, suggesting unemployment will continue to rise. It said the U.S. economy will contract 2.6 per cent this year, slightly less than it thought in April, with growth resuming in 2010, albeit at a mere 0.8 per cent.

 

The IMF said the euro-area economy would likely shrink 4.8 per cent in 2009, 0.6 per cent more than it had forecast in April. Next year, the IMF said the euro-area would contract 0.3 per cent. Japan's economy is expected to contract by 6 per cent 2009, with growth resuming slightly to around 1.7 per cent next year, while emerging and developing countries are likely to regain growth momentum during the second half of 2009, it said.

 

As far is Asia is concerned, predictions are that it couldn’t decouple from the global economy despite signs that the region is emerging from the worldwide slump faster than many economists had expected. Strong growth, particularly out of China and India had rekindled hopes the region could decouple from slower-growing advanced economies and recover on its own.

 

Indeed, it is necessary that policies should remain supportive until growth resumes and deflationary risks dissipate. Where there is room, central banks should explore cutting interest rates further and signal that they intend to keep them low until a durable recovery is under way. The IMF has shown concern over the rising government debt from efforts to shore up economies highlight the need to establish plans to tighten budgets over the medium-term.

 

"Although fiscal policy should stay supportive through 2010, plans should be made for rebuilding fiscal balances and ensuring sustainable debt paths after growth is firmly re-established," the IMF said. However, the World Bank in a report has opined that poor countries are still feeling the consequences of the global recession despite signs that industrial and emerging economies are recovering. "The nascent global economic recovery and improving financial market conditions have yet to provide the impetus needed to lift the economies of low-income countries from their deep economic downturn and dire financing challenge," it said in its report at the G 20 leaders' summit last year.

 

For the poorest countries without adequate fiscal space to respond to the crisis, core spending may face a funding gap of $11.6 billion in 2009 due to revenue shortfalls and increased demand for social protection, the Bank said.  According to The Economist there has been a lot of collateral damage due to the recession. Average unemployment across the OECD is almost 9 per cent. In America, where the recession began much earlier, the jobless rate has doubled to 10 per cent. In some places, years of progress in poverty reduction have been undone, as the poorest have been hit by the double whammy of weak economies and still-high food prices. But thanks to the resilience of big, populous economies such as China, India and Indonesia, the emerging world overall fared no worse in this downturn than in the 1991 recession.

 

The bad news is that today’s stability is worryingly fragile, both because global demand is still dependent on government support and because public largesse has papered over old problems while creating new sources of volatility. Property prices are still falling in more places than they are rising. Apparent signs of success, such as American megabanks repaying public capital early, make it easy to forget that the recovery still depends on government support.

 

Big emerging economies face the opposite problem: the spectre of asset bubbles and other distortions as governments choose, or are forced, to keep financial conditions too loose for too long. China is a worry, thanks to the scale and composition of its stimulus. Liquidity is alarmingly abundant and the government’s refusal to allow the Yuan to appreciate is hampering the economy’s shift towards consumption. But loose monetary policy in the rich world makes it hard for emerging economies to tighten even if they want to. Whether the world economy moves smoothly from great stabilization’ to a sustainable recovery depends on how well these divergent challenges are met. ---INFA

 

(Copyright, India News and Feature Alliance)

 

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