Global Economic Recovery 2011

By M. Isi Eromosele

The slow recovery from the global downturn will make this year a complex one for the world economy. The first part of the year was demanding as the world continued a slow recovery from the global recession. Progress has been uneven. In the United States, the economy will continue its slow recovery while the employment picture has worsened. A substantial inventory correction will continue, unsettling the labor market, workers income will continue to fall, resulting in additional decline in household spending. This in turn will hamper the growth in real domestic spending in many developed market economies.

The timing of a full global recovery will depend on two major connected issues:

• Stabilizing the global financial system
• Restoring confidence in the global economy

The global recession has caused a dramatic shift in spending worldwide. Companies have been putting off investment projects and instead accumulating cash reserves. Consumers have been adding to their savings while postponing major purchases. Banks basically stopped lending and instead bulked up their cash reserves. The above trends have combined to hamper a smooth path to global recovery in 2011.

It is imperative that the developed market economies continue to take influential actions that will reinstate confidence in the international economy. These financial and economic schemes must be substantial, consistent and convincing. Their framework should have the goal of establishing prolonged economic growth.

The necessary stabilization of the international financial system is an absolute requirement for global economic revival. To achieve this goal, three events need to take place:

• The liquidity of the global financial system must be maintained
• Financially draining assets must be dealt with
• Global financial regulations, standards and codes must be revised

The assertive efforts of Central Banks in developed market economies to provide liquidity to the global financial system has been mostly successful. Interbank lending rates have trended downwards since the last quarter of 2010. However, while corporate bond issuance has improved, behavior within the market are still below expectation. The issuance of large scale public debt may hamper the availability of private finance. It is imperative that Central Banks take decisive actions to enhance the flow of global credit. Conversely, governments should be cautious when contemplating supplementary borrowing.

There has been an extraordinary reversal in inter-country capital flows. The positive net flows of private credit to emerging markets turned negative in 2010. In order to maintain liquidity with the global financial system, this trend needs to be alleviated. This would require additional actions from the International Monetary Fund (IMF).

Another issue that has to be addressed is the continuing fall in the provision of trade finance, especially to emerging economies. The result is a precipitous drop in global trade. This situation can be reversed with the provision of extra export credit and trade insurance.

The United States and other developed market economies had embarked on a continuing effort to deal with the issues of toxic assets and the recapitalization of major financial institutions. Their actions have been crucial in stabilizing the global financial system. A critical trend that should continue is that key global financial institutions must not be allowed to fail.

In revising global financial regulations, standards and codes, a new international finance architecture needs to be put in place. This new architecture would have to incorporate the following components: improved transparency, more focused supervision in enforcing the revised regulations and expanding participation of emerging economies during the formulation of these regulations.

Corrective actions taken to hasten the revival of the global downturn need to be decisive, brave and forward looking. A profound and synchronized set of actions would need to be implemented by the developed global economies to move the international economy towards a full revival.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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