Monday October 15, 2012
Worries over the world economy
GLOBAL TRENDS By MARTIN KHOR
Serious concerns emerged at the recent IMF-World Bank meetings in Tokyo on the deteriorating state of the global economy and the paralysis in the US and Europe.
THERE were sobering messages on global economic prospects emerging from the just-concluded 2012 meeting of the World Bank and International Monetary Fund in Tokyo.
The IMF cut its growth projections for most major countries and said the “risks of a serious global slowdown are alarmingly high” in its World Economic Outlook released last week.
Global growth slowed from 5.1% in 2010 to 3.8% in 2011. For this year, the latest IMF estimate is 3.3% global growth, with developed countries barely growing by 1.3% while developing countries expand by 5.3%.
This 2012 forecast is optimistic as it assumes the United States and Europe will resolve their problems in economic policymaking.
The IMF posed the key issue of whether the global economy is merely facing just another temporary bout of turbulence, or whether the slowdown will endure. It said the answer depends on whether the United States and Europe can deal with their short-term challenges.
That is putting the issue blandly. The truth is that it is more difficult today to get recovery going than it was in 2009 in the aftermath of the financial meltdown.
At that time, there was a consensus among the major countries that their collapsing economies had to be boosted through fiscal stimulus, low interest rates and a massive supply of credit. The coordinated actions led to the swift and sharp recovery of 2010.
The policy winds have changed in the past two years. Most developed countries are now more concerned about cutting their budget deficits, and have thus reversed their fiscal policy from stimulus to austerity.
Countries in the Eurozone that are heavily dependent on foreign loans, and do not have the options of printing money or currency depreciation because they have the common currency, have little choice but to cut their public spending.
But even Britain, which enjoys much more policy space, chose drastic budget cuts that have now resulted in a recession.
During the IMF meeting last week, the raging debate on the wisdom of demanding extreme austerity targets for Greece and potentially other countries like Portugal and Spain in exchange for loans, broke out in an open clash.
IMF chief Christine Lagarde said Greece should be given two additional years to meet the drastic budget reduction targets that had been imposed by its creditors (the EU, the European Central Bank and the IMF itself). But the German Finance Minister strongly rebuked her, indicating Germany’s insistence on Greece fulfilling the targets on time as a condition for further loans.
Meanwhile, Greece is reeling from the spending cuts already made, with GNP falling by 6% and unemployment shooting above 25%. The public mood has reached boiling point, as evident from angry protests during German leader Angela Merkel’s visit to Athens last week.
Europe will remain the epicentre of the global slowdown, with its economy in recession this year and possibly next, even though its crisis has eased with the European Central Bank’s intention to buy government bonds of cash-strapped countries. Since the countries have to adhere to strict austerity and other targets as conditions, Europe’s economy will face contraction.
The United States by contrast has done better with growth of 1.8% in 2011 and a projected 2.2% this year, but unemployment remains.
However, it faces the “fiscal cliff” problem at the end of the year. If the Republicans and Democrats are unable to overcome their differences and arrive at a new budget deal, the package of tax and spending cuts mandated by law will kick in by January next year, and these measures are equivalent to reducing national income by 4%. The implications for the global economy are enormous.
The major developing countries are also slowing down significantly. The latest IMF forecast is of GNP growth in 2012 for China of 7.8% (from 10.4% in 2010), India 4.9% (10.1% in 2010) and Brazil 1.5% (7.5% in 2010).
The developing countries have especially been affected by the sharp decline of exports to Europe.
Thus, the three main concerns about the current global economy are the continuing financial crisis and a severe austerity response in Europe, the confrontational politics and probably greater austerity measures in the United States, and the cooling of the major developing countries’ economies.
At the IMF’s International Monetary and Financial Committee on Oct 13, developing countries’ ministers expressed their fears and frustrations over the situation in the developed countries.
According to a report by Associated Press, China’s Central Bank deputy governor said at the meeting that “a durable solution to the Euro area crisis would provide a much-needed boost to global recovery”, and that uncertainty over government debts in the United States and Japan was slowing recovery and causing “costly spillover effects to the rest of the world.”
South Africa’s Finance Minister Pravin J. Gordhan said: “We should all be committed in our resolve to avoid a worst-case scenario where strains in the euro area deepen, fiscal cliff and debt ceiling problems in the United States are not resolved, and growth in emerging market economies continues to decline.”
Guido Mantega, Brazil’s Finance Minister, told the committee: “Advanced countries should rethink their macroeconomic strategies and avoid simultaneous fiscal contractions and the consequent overburdening of monetary policies. In many advanced countries, fiscal and structural policies are hampered by political paralysis.”
He also expressed concern over monetary easing in the United States and other countries meant to encourage more bank lending, but that some worry could destabilise markets while failing to stave off recession.