Is world out of woods?

SUBMITTED TO SUBMITTED BY

Prof. ASHOK BHANSALI RAHUL GUPTA

PGPBM (2009-11)

ISB&M; NOIDA

Two years after near-meltdown, with the US looking sluggish, equity markets groggy and Europeans fighting a debt crisis, experts gathered in Italy offered a generally gloomy outlook especially for the United States and much of the industrialized world.

Economist Nouriel Roubini, who warned in booming tones that "there is a significant risk of a recession in the United States" as well as in Japan and many European countries.

Many of the growth drivers in place since the collapse of Lehman Brothers are winding up or have ended, including not only the massive stimulus spending but tax breaks, schemes such as the "cash for clunkers" program and for some countries like Russia high commodity prices.

The stimulus deemed necessary to jump-start moribund economies soon causes deficits and debt, upsetting the markets enough to spur austerity which undermines growth.

Most of the world's growth stems from a developing world led by China which is so dependent on exports that it needs the West to continue to buy, and so will suffer if recovery in the rich world proves short-lived.

Europe continues to lose competitiveness partly because of the euro, which for all the fretting over its dip earlier this year at the height of the Greek debt crisis remains high in purchasing price parity terms versus the US dollar.

The sector that is widely seen as the spark of the global recession US real estate has not recovered, with house-buying flat and the mortgage market, with its related financial instruments, essentially still in ruins.

The job picture is not improving and in parts of the developed world such as Spain, with some 20 percent unemployment it is disastrous.

"Conditions in the US labour market are awful," said Roubini, who gained celebrity for predicting the global collapse of 2008 when others were still celebrating the boom times. He added that even if some U.S. growth is maintained in coming quarters it will be so low perhaps an annualized 1 percent, which means per capita stagnation that "it will feel like recession for most people."

According to historian Niall Ferguson noted that since 2001 the United States has seen its debt-to-GDP ratio double to 66 percent and that it may well be headed toward the danger zone of 100 percent. "This is a completely unsustainable fiscal policy," said Ferguson. "Pretty soon the U.S. will be spending more on debt service than national security. That's a tipping point for any global power."

But, Roubini warned that world growth leader China was too dependent on exports to the struggling, West and predicted that within a year its economic growth will be overtaken by India, a huge nation much more reliant on its domestic market for development.

"Greece will not make it," said Sinn. He encourage Greece to restore its drachma currency despite the domestic banking collapse that could well result.

Sinn noted that bond spreads the difference between the cost of borrowing for troubled countries such as Greece and solid ones such as Germany have swiftly returned to the startling levels that preceded the Greek bailout in May.

But that development, while good for companies' bottom lines, is also a reflection of the stagnant labor market and the shrinkage of payrolls as firms hope to produce as much as before with fewer and more productive staff.

International Monetary Fund head Strauss-Kahn said the world economy was not "out of the woods" despite a faster recovery in developing and emerging countries than earlier forecast.

He told reporters during a visit to the country that although global recovery was "resuming sooner than expected, private demand was still not strong enough to signal the end of the prolonged recession experienced by the world economy.

The IMF sharply raised its estimates predicting that the world economy would expand by 3.9 per cent in 2010, much higher than the 3.1 per cent it projected last October, with the pace picking up to 4.3 per cent next year.

"The recovery is coming sooner than expected. But we are not out of the woods and we have to be cautious," he added.

Predictions for recovery have been improving steadily since last year in tandem with an explosive stock market recovery.

Strauss-Kahn, a former French finance minister, said that although a double dip could not be ruled out, the IMF did not forecast one.

The former French finance minister also warned of the risks in a premature recovery that could prompt governments to retreat from public stimulus policies too early and thus "shooting themselves in the foot".

Along with concerns over sovereign debt in the euro zone, he added that a third risk was the "huge amount of capital inflows that could go to countries such as Brazil and Indonesia that would create bubbles"

Finance Minister Pranab Mukherjee today said the world economy was not out of the woods yet and there was a need to calibrate the exit from fiscal stimulus.

“We will, no doubt, need to rightly frame our exit policy considering our respective economic situations and push for structural reforms to enhance the potential growth,” he said addressing the first session of G20 Finance Ministers’ and Central Bank Governors’ Meeting here.

Mukherjee said even though the risk of a global ‘double dip’ recession might not be high, it was important to acknowledge that the downside risks were elevated. He said that in dealing with high sovereign debt in some economies, unemployment in advanced countries, volatility of capital flows, inflationary pressures in emerging markets, and widening global imbalances, there was a danger of getting the monetary — fiscal policy mix wrong during the exit process.

Macroeconomic indicators say that global growth in the second quarter of this year has slowed down, and there are headwinds to sustaining the global recovery. The recovery in advanced economies remains fragile with high unemployment and sluggish household consumption.

Indian economy grew at 8.8 per cent during the first quarter of 2010-2011. The government is projecting the economy to grow at 8.5 per cent this year. There are concerns arising from inflationary pressures, and more importantly, from the uncertain external environment. However, with the strong domestic demand, a stable financial system and growing investor confidence we expect to remain on a high growth path.

As the process of recovery had been slow in countries in North America and also there were uncertainties in Europe, the world leaders would have to consider ways and means to overcome the present situation and find the path forward, he added.