There
is a palpable sense of gloom and impending doom in
most discussions of the world economy today. Even
before, several economists had argued that the excessive
optimism about ''V shaped recovery'' that was being
used to describe the economic revival in 2010 was
premature and misplaced, especially as none of the
fundamental contradictions of global capitalism that
led to the previous crisis had been adequately addressed.
But they were once again written off as Cassandras
by the financial media, which desperately sought sources
of ''good news'' and future engines of growth particularly
among the emerging markets.
Now even the most stalwart establishment voices are
expressing growing concern and pessimism. Oliver Blanchard,
Chief Economist at the IMF, has issued what must be
an unprecedentedly sombre and even dismal statement
at the close of the year, noting that recovery is
at a standstill in the advanced economies and recognising
that 2012 may face even worse economic conditions
than 2008.
Blanchard refer euphemistically to ''multiple equilibria
- self-fulfilling outcomes of pessimism or optimism,
with major macroeconomic implications'' and effectively
suggests that unless private expectations are managed
better by decisive government policies, negative expectations
will become self-fulfilling. But it is harder for
governments to ''manage expectations'', because private
investors themselves are schizophrenic about government
deficits and economic growth. Financial markets effectively
appear to demand fiscal consolidation by putting very
high spreads on the bonds of governments with high
ratios of public debt to GDP or fiscal deficit to
GDP. And then investors in these markets are very
surprised (and react adversely) when attempts at fiscal
austerity reduce economic activity and growth prospects.
This has already created a self-reinforcing cycle
of contraction in the eurozone, and as long as European
leaders (and incidentally the IMF) continue to press
for fiscal austerity, this will continue. Meanwhile
the peculiar political configurations in the US make
it unlikely that any real fiscal stimulus will emerge
to ensure a more broad-based and stable economic recovery.
The belief currently expressed by many economic commentators,
that a ''big bazooka'' in the form of even looser
monetary policy of the European Central Bank and the
US Federal Reserve, will be sufficient to lift economic
activity, is unwarranted.
Chart 1 shows quarterly growth data for real GDP since
the trough of the crisis in late 2008. It is evident
that Blanchard is completely correct in noting that
the recovery in the major advanced economic regions
is sputtering if not dying. (Data in all charts is
based on IMF's Global Economic Indicators database.)
Output growth in Japan has already turned negative
once again in the most recent quarters, while it is
sluggish in the US and likely to become much worse
in the euro area given the inability to resolve the
internal problems of the eurozone.
Chart
1 >>
(Click to Enlarge)
In the past global recession, many developing countries
sufffered quite sharp declines in output but then
the recovery was also faster and more buoyant. Chart
2 shows a sample of emerging market economies (and
does not inlcude China and India about which enough
discussion already exists). Real GDP recovered more
sharply in the economies that had expereinced the
biggest slumps, but despite this, since the middle
of 2010 there has been a deceleration in almost all
of the economies described here.
Chart
2 >>
(Click to Enlarge)
This sluggish recovery or beginning of renewed recession
is of major concern not just in itself, but because
even the period of recovery was already not associated
with much improvement in labour market conditions.
Chart 3 shows that in the three major advanced economic
regions, open unemployment rates increased during
the Great rcession, and since then have remained at
these high levels despite subsequent increases in
incomes and economic activity. Chart 4 shows that
(other than for Turkey and Brazil) a similar process
was also under way for the emerging economies considered
here.
Chart
3 >>
(Click to Enlarge)
Chart
4 >>
(Click to Enlarge)
A September 2011 report from the ILO to the G20 found
that in the first quarter of 2011, only a handful
of countries (notably, Argentina, Brazil, Turkey and
Indonesia) had absolute employment levels that were
above the levels of the first quarter of 2008, before
the eruption of the global crisis. In some countries
both output and employment were still below their
earlier levels (including the developed world: European
Union, the US and Japan) while in others like South
Africa, output had recovered but employment was still
lower than in early 2008. So the weakening prospects
for the world economy come at a time when labour market
conditions are already very fragile across the world.
This is extremely bad news for the developing world.
Already, it is evident that it is misplaced and even
foolhardy to hope that economic expansion in China,
Brazil, Russia and some other countries will be enough
to compensate for the slowdown in the advanced economies.
In sheer quantitative terms, total incomes and import
demand in these countries simply cannot counterbalance
the falling net demand from US and Europe. But there
are further reasons why developing countries - including
those that are currently being expected to save the
world economy - cannot expect an easy ride in the
coming year themselves.
First, most developing regions are directly affected
by the slowdown in import demand from Europe, and
to a lesser extent the US. For example, manufacturing
exports from developing Asia, particularly China,
are already affected by the slowdown in Europe and
the process is likely to intensify in the coming months.
Second, the reduction in China's exports affects its
own demand, as the complex export production platform
it is the centre of in Asia reduces demand for raw
materials and intermediates. Third, many developing
countries have also been affected adversely by the
sudden and rapid outflow of mobile finance capital,
as banks and other financial institutions book their
profits in emerging markets in order to cover their
losses. This has also been associated with rapid depreciation
of several emerging market currencies, which causes
their import bill for oil and other essential goods
to increase, but not necessarily affecting their exporting
potential in the current climate.
Fourth, there are reasons to be more concerned than
many analysts appear to be, about the immediate prospects
for the Chinese economy. As the housing bubble in
China is pricked and real estate prices fall, this
will have negative multiplier effects on all related
activities in construction and so on. The debt deflation
associated with falling asset prices may also affect
consumption and employment. So there is a serious
internal threat to growth, unless the Chinese government
takes active measures to revive consumption, without
relying on expansion of household debt. In many other
emerging markets, the previous boom was associated
with credit-driven bubbles, and as these are burst,
the prospects for economic expansion will similarly
be affected.
So there are good reasons for Blanchard of the IMF
and others to be gloomy about global economic prospects.
However, unless they and others who have real influence
on economic policy making across the world argue for
a real change in both economic paradigm and current
strategy, things are unlikely to look up in the coming
year.
*
Note: This article
was originally published on 26 December, 2011, in
the Business Line, and is available at:
http://www.thehindubusinessline.com/opinion
/columns/c-p-chandrasekhar/article2749931.ece?
homepage=true
