Will the global economy bounce back?

The head of the International Monetary Fund (IMF) has warned that Europe's debt crisis risks plunging the global economy into a "lost decade", saying it is up to rich nations to shoulder the burden of restoring growth and confidence. While describing European plans to bolster a rescue package for Greece were a "step in the right direction", the outlook for the world economy is not going to be a smooth one, rather 'remained dangerous and uncertain ...There are clearly clouds on the horizon. Clouds on the horizon particularly in the advanced economies and particularly so in the European Union and the United States...Asia was not immune to the problems currently sweeping the eurozone.' This appears to be the latest warning on the global economy. So all are now observing the happenings in economies like Greece and at the same time the global economy - what is in store! After a year of fragile and uneven recovery, global economic growth started to decelerate on a broad front in mid-2010 and this slower growth is expected to continue into 2011 and 2012. The United Nations baseline forecast for the growth of world gross product (WGP) is 3.1 per cent for 2011 and 3.5 per cent for 2012, which is below the 3.6 per cent estimated for 2010 and the pre-crisis pace of global growth. The mid-year issue of the World Economic Situation and Prospects (WESP) observes - economies continue to drag the global recovery and pose risks for world economic stability in the coming years. Exports of developed economies have not yet achieved full recovery and were still 8.0 per cent below the pre-crisis peaks seen in the third quarter of 2010. Side by side, many developing countries have been able to use the policy buffers (in the form of ample fiscal space and vast foreign-exchange reserves) they had generated in the years before the crisis to adopt aggressive stimulus packages. Incidentally, it may be referred here that WESP is a joint product of the Department of Economic and Social Affairs, the United Nations Conference on Trade and Development (UNCTAD) and the five United Nations regional commissions. It provides an overview of recent global economic performance and short-term prospects for the world economy and of some key global economic policy and development issues. One of its purposes is to serve as a point of reference for discussions on economic, social and related issues taking place in various UN entities during the year. It is of course heartening to see that the emerging economies of India, China and Brazil are leading the global economic recovery, according to a UN report released weeks back - 'the rebound has been led by the large emerging economies in Asia and Latin America, particularly China, India and Brazil'. As per projections: developing countries would continue to drive the global recovery, their output growth is also expected to moderate to 6.0 per cent on average during 2011-2012 [down from 7.1 per cent in 2010]. Though China and India's gross domestic product (GDP) growth is also expected to experience some moderation in 2011 and 2012, yet the volume of exports of many emerging economies [including Brazil, China, India and some other developing economies in Asia], have already recovered to, or beyond, pre-crisis peaks. At the same time it is necessary to observe that so called minnows are also coming up. European Bank for Reconstruction and Development (EBRD) forecasts GDP growth in Turkmenistan in 2011 and 2012 at a rate of 10-12 per cent! Turkmenistan will experience the largest growth in real GDP of all 29 countries in which the bank operates. This optimistic forecast of the EBRD connects to the implementation of major state construction projects and to increase gas exports to China. During January-May 2011 GDP growth was 14.5 per cent. According to the IMF, Turkmenistan is expected to benefit from high prices for natural gas and become one of the leaders among the Commonwealth of Independent States (CIS) states in terms of growth, which reached 9.0 per cent in 2011. The Asian Development Bank (ADB) estimates that in 2011 the GDP growth in Turkmenistan is 9.0 per cent, and in 2012 - 10 per cent. And as per the UN report - World Economic Situation and Prospects 2011 - Turkmenistan's GDP growth will be at least 10 per cent in 2011 and 2012. The valid question has been raised - will the current boom in capital inflows to developing countries end in a bust? Yilmaz Akyuz, former Director of the UNCTAD, rightly observed: the current boom in capital inflows to developing countries has been creating or adding to macroeconomic imbalances and financial fragility in recipient countries in large part because they have been shy in applying breaks on them. Several developing countries [India, for example] are now experiencing currency appreciations even faster than surplus economies and relying on capital flows to finance growing current account deficits. It is quite clear that the conditions that drive the current surge in capital flows, notably the historically low interest rates in advanced economies, cannot be sustained indefinitely. A reversal of fiscal and monetary stances in the advance economies is not a matter of if but of when. The boom in commodity prices and capital flows may also be ended by monetary tightening in China. So the causes, nature and effects of the current boom in capital flows have to be scanned at this juncture in an unbiased manner so as to guard against the possible consequences of its reversal. A lot depends, however, on the transatlantic economy that still remains at the forefront of trade liberalisation and globalisation debates because of its size and domination of the global economy. It should not be forgotten that the United States and European Union (EU) together comprise 54 per cent of global GDP while only having 11 per cent of the total world population. The transatlantic investment relationship is currently valued at more than $3.0 trillion and employs up to 14 million workers on both sides of the Atlantic. But the very fact remains - following the global economic crisis, the transatlantic partners are struggling with a number of common challenges that can significantly impact their position in the global economy. Obvious enough, addressing sluggish economic growth, high unemployment rates, and the need to make transatlantic businesses more competitive will require strong collaboration and coordination between policy makers from both sides of the Atlantic. Though these refer to mutual challenges, yet the long-term consequences of the sovereign debt challenge and ways of arming EU institutions with stable anti-crisis mechanisms to prevent future disturbances from threatening the economic stability of Europe loom large! The transatlantic partners need to strengthen [their already existing strong economic ties] towards shared economic objectives in order to implement policies that will lead to long-term recovery, stability, and growth of the transatlantic economy. To conclude in the line of IMF Chief, "Our sense is that if we do not act boldly, and if we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability and potential collapse of global demand ... We could run the risk of what some commentators are already calling the lost decade" ["lost decade" reference carries echoes of Japan's experience of persistent deflation, mounting debts and economic weakness through the 1990s and beyond after its real estate bubble burst - an outcome many analysts fear could be repeated given the debt and property origins of Europe's problems]. The writer Dr B K Mukhopadhyay teaches in Gauhati University, India. He can be reached at email: m.bibhas@gmail.com