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Saturday, June 2, 2012

Are we surely going to welcome recession again?

Looking through the glass, can we see what is written on the wall? Yes, strong signals are there that the global economy is getting ready for a recession revisit - in a stronger form.

As the things stand now, the global economy is gradually gaining momentum, but the recovery is fragile, extremely uneven across different regions and could be derailed by the crisis to a significant extent in the euro area.

Will the exit of Greece help solve eurozone's problems? The eurozone crisis overshadowed the recent talks. European stock markets fell about 2 per cent amid anxiety that Greece might have to exit the euro.

It is rightly been viewed now that Greece should not be lulled into believing that an exit from the euro would lead to the sort of short shock and sharp rebound that Argentina and Asian nations experienced when they devalued their currencies more than a decade ago. The experience of other countries suggests that Greece too could benefit after the turmoil from eurozone expulsion. Side by side: is it not also a fact that it would be too weak alone to lift itself out of trouble? "It's one thing to leave a currency peg, quite something else to leave a currency. It's not a magic wand that you can wave to solve all of Greece's problems," said Nick Kounis, head of macro research at ABN AMRO.

Argentina's experience is now being referred to on this score. After defaulting and abandoning its currency peg in 2001-2002 the economy of Argentina shrank for four successive years (1999 to 2002), including a 10.9 per cent contraction in the final year, but thereafter grew by an average 9 per cent in the subsequent five years.

It is good to note that now EU leaders want Greece to remain in the eurozone but to "respect its commitments". "The eurozone has shown considerable solidarity having already disbursed, together with the IMF (International Monetary Fund) nearly 150bn euros in support of Greece since 2010."

Is China also going downhill? Then what about the others? Not a smooth running too. Lt us have a look at some of the economies chosen for the purpose.

The World Bank cut its economic growth forecast for China this year to 8.2 per cent from 8.4 per cent and urged the economy to rely on easier fiscal policy that boosts consumption rather than state investment to lift activity. In its latest biennial East Asia and Pacific economic update, the World Bank said a slowing China will drag growth in emerging East Asia to two-year lows this year, but warned Europe's seething debt crisis could inflict even bigger damage if it worsens. Accordingly, sluggish US and European demand and a softening Chinese property market would combine to weigh on the Chinese economy in the near term. But if governments and central banks act in time to stabilise activity, economies should recover next year. As per latest reports: China will stick to active fiscal and prudent monetary policies in a bid to sustain relatively fast economic growth, create jobs, build affordable housing, conduct medical reforms and improve the social safety net in order to boost consumption, which, of course, has much room to grow. The government will also support growth of micro-and-small-sized private enterprises and create a level playing field for them. It may be mentioned here that China has started to use active fiscal policies and fine-tuned monetary policies to bolster economic growth, which has eased amid slower investment and exports. If such economies could offer support to the falling west the better would be the case indeed.
Tokyo struggles to kick-start the economy: Japan continues to be overcast with cloud. Fitch Ratings cut Japan's credit rating by two notches citing its "leisurely" efforts at shrinking a massive public debt as Tokyo struggles to kick-start the economy (third largest in the world today). The global agency downgraded Japan's long-term foreign currency rating to "A+" from "AA", with a negative outlook, noting "growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios". In fact, the move follows similar downgrades by rival agencies Moody's and Standard & Poor's in the past year-and-a-half. The matter of concern: national debt amounts to more than twice its gross domestic product (GDP) - the highest among industrialised nations and as such definitely a problem that would usually mean paying a high premium to borrow funds. All of the government efforts that are currently being taken are not largely being accepted - the government is trying to double Japan's consumption tax to 10 per cent, an unpopular cornerstone of a bid to stem the national debt as the costs of a rapidly ageing population heap pressure on public coffers.

Bank of Japan (BOJ) Governor Masaaki Shirakawa said that there was absolutely no change to the central bank's stance of continuing to pursue powerful monetary easing to beat deflation. He observed that the drawbacks are outweighing the benefits in cutting interest rates, including lowering the 0.1 per cent interest, that is, the amount the BOJ pays to financial institutions' excess reserves parked at the central bank. Targeting longer-dated government bonds in the central bank's asset-buying programme in the near future has also been ruled out, as the same cannot be taken as an immediate need to do so in order to achieve the central bank's existing target for asset purchases. Incidentally, it may be mentioned here that the central bank kept monetary policy steady as widely expected after having offered stimulus just last month, saving ammunition for later in case Europe's deepening debt crisis warrants further supportive action to shield the de facto fragile economy.

Britain experiences a technical recession: Britain's recession is worse than previously thought, as latest official figures showed that the economy shrank by more than expected in the first quarter of 2012. UK gross domestic product (GDP) in volume terms decreased by 0.3 per cent in the first quarter of 2012, revised from a previously estimated decline of 0.2 per cent. In fact the British economy has now returned to a technical recession (which is defined as two successive quarters of contraction), after shrinking by 0.3 per cent in the final three months of 2011. Expectations had been for no change in the first-quarter figure, according to analysts.

Italy prefers growth to austerity: It is good that Italy (economy is in recession as it battles its debt crisis) signalled its support for countries that want the European Union to move from austerity to growth policies. Budgetary as well as fiscal discipline is essential to address the present crisis, but from then on the focus should switch on growth measures, as rightly being observed by the Italian authorities.

The biggest threat to the US economy: So far as the big brother is concerned, the eurozone sovereign-debt crisis is the biggest threat to the US economy. However, the good news is that US domestic risks have diminished somewhat, and growth momentum has picked up modestly. Consumers seem willing to spend and businesses are more disposed to hire - albeit, cautiously. This means that over the next year US growth will average between 1.5 to 2 per cent in the near term. Still, the longer-term outlook is clouded by uncertainty over how America's burgeoning sovereign-debt problems are addressed.

Germany dodges a recession: As the German economy had contracted by 0.2 per cent in the last three months of 2011, the numbers mean that Europe's powerhouse economy successfully dodged a recession (which is defined as two consecutive quarters of negative growth). Side by side, the other picture is that robust exports and consumer demand steered the German economy, Europe's biggest, clear of recession in the first quarter of 2012, but the pace of growth looks set to slow subsequently. Gross domestic product (GDP) grew by 0.5 per cent in the period from January to March on a quarterly basis. The Federal Statistical Office of Germany (Destatis) provided a breakdown of the different GDP components, which showed that growth was driven primarily by consumer spending which grew by 0.4 per cent on a quarterly basis in the period from January to March.

Vietnam boosts domestic production: In Vietnam, economic growth this year is expected to reach around 5.7 per cent before increasing to 6.3 per cent next year while year-end inflation is forecast to decline to below 10 per cent. According to the World Bank, while the economy has started to stabilise, the significant tightening of macroeconomic policies along with an uncertain global economic environment were beginning to take a toll on growth. Real GDP growth decelerated from 6.8 per cent in 2010 to 5.9 per cent in 2011 and further to 4 per cent in the first quarter this year as domestic demand slowed, affecting construction, services and utilities. Tightening domestic policies have dampened investment, particularly in infrastructure, real estate and private consumption. The trade deficit in the first five months of the year surged sharply to US$622 million, roughly 3.5 times higher than that of the first four months. The country in the period fetched $42.86 billion from exports, up 24.1 per cent over the same period last year, while spending $43.48 billion for imports, up 6.6 per cent. This has been attributed to the recovery of domestic production - most imported goods were raw materials serving local production. The government's decisions to loosen monetary policies, cut interest rates and cool down inflation are of course positive factors to boost domestic production as well as export and import activities. However, the trade deficit of this year's first five months was equal to only a tenth of the same period last year.

France challenges austerity drive: So far as France is concerned, it is clear now that the French Socialist leader's victory is seen as a challenge to the prevailing austerity drive in the EU, which is favoured by Germany. President Hollande has to shift the emphasis from austerity to growth - a key message he gave to French voters.

Sluggish economic outlook in Australia: There's more worrying news for the Australian economy with the Reserve Bank cutting its economic growth expectations. In forecasting marginally lower growth of 3 per cent over 2012 and 2013 the RBA has signalled that earlier predictions were overly optimistic. Clearly, the admission of a sluggish economic outlook features in the RBA's latest quarterly statement on monetary policy released.

The question has been raised as to whether this is an admission that the Reserve Bank got it wrong by keeping interest rates high for so long?

The economy is now assessed to be growing by about 3 per cent in 2012 and 2013, compared with an earlier forecast of up to 3.5 per cent growth in 2012 and up to 4 per cent in 2013. The central bank has also lowered its outlook for export growth and residential building activity as well as revised its outlook for inflation. It now sees underlying inflation excluding the impact of the carbon tax at just 2 per cent in 2012 and that is down from 2.5 per cent earlier. No doubt, the sharp decline in inflation (down in the most recent CPI reading to 1.6 per cent below the 2 to 3 per cent comfort band) was the catalyst for the Reserve Bank to dramatically cut interest rates by half a percentage point to 3.75 per cent. The jobless figure is also not a good point to see in as much as it is currently placed at 5.2 per cent. Employment growth is expected to remain subdued in the near term - the impact of the high Australian dollar exists on this score as a key pressure. In fact, as per ongoing trends there is a possibility that in the near term, labour shedding across a range of industries outside of the mining sector could accelerate as firms continue to adjust to the high exchange rate, weaknesses in the property market and the effects of weaker public demand.

New Zealand's toughest budget: New Zealand's government unveiled its toughest budget in 20 years with no spending increase, as expected, in a slowly growing economy and lower tax revenue, while sticking to its pledge to return to surplus by 2015. The government said the "zero" budget for the second year would see net new government spending slashed to only NZ$26.5 million (US$19.89 million) over four years from an operating allowance of NZ$800 million a year previously. The economy wishes to remain on track to return to budget surplus in 2014/15, which will strengthen New Zealand's economic resilience. The government now expects a tiny surplus of NZ$197 million in 2014/15, down from February's forecast of NZ$370 million (in last October, the Treasury forecast a surplus of NZ$1.45 billion!).

Fiscal policy: So, things are not in good shape in the overall sense. As the things stand now, the EU has to take action to return Greece to economic growth and job creation. No doubt, "vital reforms" were essential for Greece to overcome its economic problems. Continuing vital reforms were the best guarantee for a more prosperous future in the euro area. For the EU now the task is to look at ways to deepen the EU internal market, boost mobility in Europe's labour market and better target European Investment Bank funding for projects. Such measures could help stimulate growth.

Fiscal policy is all set to become even tighter in the United States and Europe. In fact, fiscal policy in the United States is already tightening. High probability is there that the Federal government purchases will contract (after adjusting for inflation) over the next several years, which, in turn, would act as a major drag on growth. State and local spending is also expected to fall for at least another year. In Europe, not only are the most indebted countries (Greece, Ireland and Portugal) in the midst of tough austerity programmes, but three of the four largest eurozone countries (France, Italy and Spain) are being pressured to drastically cut budget deficits and sovereign-debt levels.

The eurozone crisis and recession will have a differential impact on the rest of the emerging world. Latin America and Africa are relatively more vulnerable to the United States and China. Barring a catastrophe in either economy or another plunge in commodity prices, the growth in these regions should hold up fairly well.

Two sides of the same coin: In fact, as of now Europe remains the most significant external risk, but it is premature to conclude at this stage that there exists chance that the sovereign debt crisis in Europe, if it further intensifies, could derail the global economy. Whatever is, while there are many risks facing the global economy right at this juncture, two look particularly threatening over the next year: the possibility of a financial meltdown in the eurozone, with some countries exiting, or a messy default by one or more of the large eurozone countries, especially Italy or Spain. It is being rightly observed that such a "Lehman moment" for Europe would likely push the global economy into recession. The other big risk is a sharp slowdown in fast emerging China's growth, triggered by a bursting of its real estate bubble. Such a scenario would, in turn, be the biggest impact on the rest of Asia and commodity-exporting emerging markets. So, full-fledged global cooperation is essential if the catastrophe is targetted to be blocked for the benefit of everyone.

The need for economic growth as well as measures to restore financial stability would continue to exist as two sides of the same coin. It is better remembered that dealing with deficits and getting growth are not alternatives, they go simultaneously - one needs to do one in order to get the other. "With slow growth, high unemployment and limited room for maneuver regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence," as rightly assessed by the Organisation for Economic Co-operation and Development (OECD).

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