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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