Global economy in 2012: Is recession certain to revisit?
December 26, 2011 00:00:00
What is the writing on the wall? We are not astrologers, but if the current trends are of any indication recession is certain to revisit. Though a number of positive steps are being taken globally, yet the same cannot show the zero-level-risk in as much as the big economies are still in deep waters and the emerging ones are also not in a strong position compared to early 2011.
The Paris-based Organisation for Economic Co-operation and Development (OECD) assesses that the US economy, the world's largest, will expand by 1.7 per cent in 2011 and 1.8 per cent in 2012. Accordingly, the forecast for US growth is of 2.6 per cent and 3.1 per cent, respectively. The euro-zone economies may grow by 1.6 per cent in 2011 and 0.3 per cent in 2012, instead of a previously predicted 2.0 per cent in each year. The G-20 economies as a whole would grow by 3.9 per cent this year and 3.8 per cent next year.
Undoubtedly, as of now, the global economy is on a slippery slope - the euro-zone appears to have tipped into a mild recession (economic recession is a state of financial meltdown, which can last for a period of few months to a couple of years and can affect the regional or world economy, leading to financial crisis, market crash, unemployment and economic depression and a long-lasting impact of economic recession can lead to economic depression). And the rest of the global economy is struggling to hold on to firm ground. The growth rates in India and China are slowing down and Japan's exports are tumbling. Ripples from the slowdown have been felt so far as Brazil is concerned as its central bank is again expected to lower interest rates for the third time since August by a hefty 50 basis points, to 11 per cent.
The Eastern European countries are wobbling as credit dries up from a pullback in lending by the euro-zone banks. In the US, the improving economic picture gathered clouds after a mixed batch of economic data and downward revision of third-quarter growth to 2.0 per cent, doused some of the optimism for a strong fourth quarter. Consumer spending slowed in October 2011 and business investment weakened, showing and indicating a recovery that remains weak and vulnerable to shocks so to say!
For the US, forecasts are being revised downward for next year. The Institute of International Finance noted in its latest forecast near-term resilience, while at the same time warned of storm clouds looming ahead. The Levy Centre has forecast that Europe's debt crisis will hit the US through financial markets and its banks, weakening exports, lowering corporate profits and dragging the country into recession next year.
Actually, key to global growth prospects was the outlook for the euro- zone, whose leaders agreed to increase the size of their bailout fund to ?1.0 trillion and write down the Greek debt by 50 per cent. Practically, it is the euro-zone's problems that are bound to be a threat to the global economy.
The moot question is: Can the UK fire up the engines of the British economy? With no spare cash to spend on stimulus, the government has looked to the Bank of England to keep monetary policy loose to support growth, with some expecting it to start printing money again, despite inflation running at more than twice the target (2.0 per cent). Leaving the EU is not definitely the solution at this juncture; rather reforming the EU will be the value-addition.
Lack of growth in the British economy is a matter of big concern. Critics say: The tough austerity plan is only making matters worse! Dealing with Britain's debts decisively seems to be the only way to restore long-term growth and stability, and to also keep financial markets at bay. Europe must urgently fix its banks and deal with its debts, as so rightly opined by the British Prime Minister David Cameron.
The stern reality is to be taken note of on this score -- any prolonged economic crisis in the rest of Europe (the UK's main export market) would hurt Britain when the government is trying to rebalance a struggling economy and increase the sale of British goods and services overseas. Cameron has been accused of not taken a tougher line with the European Union (EU) over funding and human rights. Yes, the fact is, little Britain could do to "insure" itself against what was happening elsewhere on the continent. "The euro-zone is a threat not just to itself but also to the British economy, and a threat to the worldwide economy. Action needs to be taken .. to strengthen Europe's banks, to build the defences that the euro-zone has, to deal with the problems of debt. They've got to do that now. They've got to get ahead of the markets now."
So, 2012 will not be a smooth one - noted Columnist Stella Dawson rightly opined.
It is also a fact that under the ongoing facts and circumstances, the financial markets continue to be volatile as European leaders yet not able to deliver credible solutions to the sovereign debt crisis and US lawmakers hit gridlock on slashing the budget deficit and thus furthering the process of eroding business and consumer confidence and damaging growth prospects.
Financing problems worsened for Italy, Spain and even Germany over the past weeks. Dark and ominous clouds are not ready to leave Italy! Italy's issuance of ?8.0bn in longer-term debt is only a tip of the iceberg. The two-year Italian paper (priced at 8.0 per cent) is already one full point above the yield considered affordable by a nation which can reasonably be termed as a 'stalled economy.' Belgium, very recently downgraded from AA-plus to AA by Standard and Poor's, raised cash, with the cost of insuring its debt having hit a record level.
Even the minnows are also not registering a strong show! Between 2008 and 2010, Latvia, a small country on the Baltic Sea coast and a member of the European Union, lost a huge 21.7 per cent of its real gross domestic product (GDP). It is one of the largest recent GDP falls not only in the history of the EU, but also globally. But the crisis is not the classical 'boom and bust' cycle-type crisis: Latvia had to face cyclical, structural, financial and global problems simultaneously. Vietnam's economy has recently exhibited high growth and side by side high inflation rate - the highest inflation rate among the Asia economies. Though the government has taken steps to improve the benchmark interest rate, credit control as well as reduced the size of public spending and taken a series of measures to try to curb inflation, yet the problems keep the government on its toes.
So, where is the silver lining - can we see it? European finance ministers have been reviewing and attempting to strengthen the region's bailout fund, seen only a couple of months back as the centrepiece for halting its debt crisis. But the fact remains that the sharp deterioration in the euro-zone debt prices, which sucked very recently in Germany in a failed Bund auction, has undercut how much the fund can be leveraged, practically leaving investors highly sceptical. Fears of a sovereign ratings downgrade for France spread as its banking sector problems festered.
Goldman Sachs was prompt enough to issue the warning bell that the public sector funding problems, which are hurting bank profits were restricting household and corporate credit in Europe, "could turn the moderate recession we are forecasting into something more akin to the 2008-09 experience."
And what about the corporate sector? Reasons are there to believe that employment augmentations may not be there. The US biggies are showing new caution in as much as Boeing announced plans to close the shutter on a Kansas factory that employs 2100 people, as it prepares for US federal budget cuts that will hit defence spending hard. What is more in store! The Bank of America began sending lay-off notices to technology staff as part of plans to cut 30,000 positions over the next few years. Wells Fargo also began job cuts. Whirlpool is also no exception, the world's largest maker of household appliances. It is reducing production due to the softening of demand worldwide, already on the verge of cutting around 5000 jobs in North America and Europe.
Dr Mukhopadhyay, a noted Management Economist, is attached to the Department of Business Administration, Gauhati University, Guwahati, India. He can be reached at email: m.bibhas@gmail.com
