The economic recovery is seemingly on track and in fact strengthened during the first half of 2010. The global financial market however, suffered a setback with the turmoil in sovereign debt markets leading to sharp currency movements. The extent of recovery varies across regions, with Asia noticeably in the lead. The US and Japan experienced a slowdown in the second quarter of 2010 while growth accelerated in Europe and remained strong in emerging and developing countries
The outlook for the global economy remains uncertain as volatility in commodity, currency and financial markets have not shown any visible signs of easing. The International Monetary Fund (IMF), in its latest “World Economic Outlook (WEO) October 2010”, confirms that the world economy expanded at an annual rate of 5.25% in the first half of 2010 and this is half-a-percentage higher than in the July 2010 WEO update. The report adds that the world trade and industrial production have continued to rebound, manufacturing confidence indices are back to levels that existed prior to the crisis and employment has begun to grow again in advanced economies.
However, the economic activities are lagging in advanced economies, as the consumer confidence remains low. The US is close to precrisis levels of output but well below precrisis trends and activity slowed further in the second quarter of 2010. Japan and euro area are still noticeably below precrisis levels of output and remain dependent on foreign demand.
Growth in advanced economies hovered around 3.5% in the first half of 2010 while emerging economies expanded by 8% during the same period. Global economic growth is projected at about 4.8% in 2010 and 4.2% in 2011, with a temporary slowdown during the second half of 2010 and first half of 2011. Output of emerging and developing economies is forecast to expand at rates of 7.1% in 2010 and 6.4% in 2011. Growth in advanced economies however is forecast to be only 2.7% and 2.2% respectively.
The IMF report however cautioned that the outlook still remains uncertain and there are downside risks that could derail the process of recovery. The sustained economic recovery rests on two ‘rebalancing’ acts:
- First, the ‘internal’ rebalancing with strengthening of private demand in advanced countries that will facilitate fiscal consolidation
- Second, the ‘external’ rebalancing, with an increase in net exports in deficit countries and a decrease in net exports in surplus countries
Appropriate policies are required to support these rebalancing acts. For example, the advanced economies must speed up the reform of the financial sector in order to achieve healthy credit growth. Furthermore, fiscal adjustment needs to start as quickly as possible and concrete plans to cut future budget deficits are urgently required. The key emerging economies meanwhile will need to further develop domestic sources of growth with greater exchange rate flexibility, the report adds.
The UCLA Anderson Forecast, a leading forecasting group in the US, predicts that the rising unemployment will pose a major challenge to the US and other advanced countries. It predicted that the US is likely to have a “jobless” recovery in 2010 with unemployment claims rising into mid-2010, peaking at a national rate of 10.5% and remaining above 9% through 2011.
The forecast also adds that although the housing market in the US is almost fully “corrected”, the home prices will continue to decline in 2011 as consumers focus on saving money in view of uncertainties. Besides construction, education and health services, most other employment sectors including the government will continue to decline or remain flat. As a result, the labour market is unlikely to recover; though, there are clear signs of recovery in the overall economy.
The theory of “jobless recovery” received support from Nobel laureate Paul Krugman. He claimed that the unemployment rate in the US is worse than contemplated earlier by the government. He therefore pleaded for a second round of fiscal stimulus for improving the labour market condition. While some economists are warning against an early withdrawal of stimulus packages, others are expressing their doubts on the long-run viability of such measures. William R. White, the former chief economist of the Bank for International Settlements (BIS), warned that the world has tackled the problems at the heart of the economic downturn and is likely to slip back into recession. He further warned that government actions to help the economy in the short run may be sowing the seeds for future crises. He was particularly critical of “printing money out of thin air” by the global central banking system that eventually produced nothing but heaps of debt.
The policy of financing deficits through printing money, usually known as “Quantitative easing”, to inject fresh liquidity into the system with a view to propel the economy has come under severe attack. It has been argued that this policy, as is now predominantly practiced in US, may lead to excess liquidity, depreciation of dollar and various speculative activities.
The massive influx of dollars as hot money may generate new bubbles in stock and real estate markets of emerging and developing countries. Depreciation of dollars may also cause commodity prices to surge with impact on general price level and more importantly, if all nations engage in a “currency war”, the global economy could face a serious challenge.
Is there any lesson that can be learned from the current crisis? While opinions can differ, one common suggestion is that the financial system must be made more stable with stronger regulation. Such a message is implicit in a recent paper published by the prestigious Brookings Institution. The paper concludes as follows: one thing the crisis does show is that fraud, corruption, and government interference can eat away at the foundations of even the deepest financial systems. This is especially so, when these problems are compounded by a regulatory system that is too narrow and rule-bound in its outlook and that, at times, turns a blind eye to obvious rot in the system. Now that, at least, is a lesson the emerging markets definitely should take away from the financial crisis.
The inherent instabilities under capitalism have often been blamed for fluctuations in the economy. Over-borrowing, over-investment and speculative activities that characterise many free market economies can lead to business cycles. For example, the US has suffered 10 recessions since the 1940s and on an average; they have lasted for 10 months. The worst were those of 1973-75 and 1981-82, both lasting 16 months. The traditional belief is that the market is self-adjusting and in the absence of any government intervention, fluctuations will ease automatically through the forces of demand and supply. Market forces however cannot solve the current crisis. As Joseph E. Stiglitz, Nobel laureate in Economics, points out in a paper, the crisis has been caused by a unique combination of ideologies, special-interest pressure, populist policies, bad economics and sheer incompetence. The need of the day is fundamental reforms and striking a new balance between the market and the government, he strongly argues.
What are the prospects for Asian countries? IMF’s Regional outlook released on April 29th 2010, shows that Asia is leading the global recovery and the region’s contribution to global economic growth will continue to exceed that of other regions in the next two years. The growth forecast for Asia has been revised upwards by the IMF. The region will grow by 7.1% in 2010 and that may extend up to 2011, which is 1.25% higher than that predicted in October 2009.
The crisis may open a new “window of opportunity” for Asia if the countries can collectively reduce their dependence on external demand by undertaking appropriate reforms in product and labour markets, fiscal and exchange rate policies, and financial markets, the report suggests. Only time will tell.
THE TASK:
The World Bank has just awarded a project to the consulting firm that you work in. The project is titled “The Global Economic Recovery: 2010 and Beyond”. Your project leader is inviting submissions from consultants. With the newly acquired knowledge of global and regional development problems from you decide to file a submission report.
GUIDE TO THE TASK:
Having discussed the matter with colleagues, the consensus is that you should seek to answer the following issues in order to make an authentic report:
1) Compare the global economic crisis of 2008-09 with Asian crisis of 1997-98 in terms of causal factors, severity, and the recovery measures. Identify the lessons that can be learned from these crises.
2) Evaluate the success of policy measures that have already been undertaken so far to tackle the global economic crisis. You may illustrate with the help of an example, referring to a country that you are familiar with.
3) Examine the challenges on the road to sustainable economic recovery and suggest appropriate policies both at national and international levels. Give your point of view on IMF’s suggested policy of “rebalancing global demand”.
4) If you think that slow growth in advanced economies would seriously jeopardise recovery in developing and emerging economies, justify your answer with necessary illustrations.
Note: The report should mainly cover your own thoughts and insights rather than textbook-type recommendations and strategies. Avoid also unsubstantiated statements, restating rather than evaluating, and emotive arguments lacking in clear perspectives and critical thinking.