RSS Feed
By M. Isi Eromosele
Following two years of anemic and uneven recovery from the
global financial crisis, the world economy is teetering on the brink of another major
downturn. Output growth slowed considerably during 2011, especially in the developed
countries.
The baseline forecast foresees continued anemic growth
during 2012 and 2013. Such growth is far from sufficient to deal with the
continued jobs crises in most developed economies and will drag down income
growth in developing countries.
A serious, renewed global downturn is looming because of
persistent weaknesses in the major developed economies related to problems left
unresolved in the aftermath of the Great Recession of 2008-2009.
The problems stalking the global economy are multiple and
interconnected. The most pressing challenges are the continued jobs crisis and
the declining prospects for economic growth, especially in the developed countries.
As unemployment remains high, at nearly 9 per cent,
and incomes stagnate, the recovery is stalling in the short run because of the
lack of aggregate demand. But, as more and more workers remain out of a job for
a long period of time, especially young workers, medium-term growth prospects
also suffer because of the detrimental effect on workers’ skills and experience.
The rapidly cooling global economy is both a cause and an
effect of the sovereign debt crises in the Euro zone and of fiscal problems
elsewhere. The sovereign debt crises in a number of European countries worsened
in the second half of 2011 and aggravated the weaknesses in the balance sheets
of banks sitting on related assets.
Even bold steps by the Governments of the Euro zone
countries to reach an orderly sovereign debt workout for Greece
were met with continued financial market turbulence and heightened concerns of
debt default in some of the larger economies in the Euro zone, Italy
in particular.
The fiscal austerity measures taken in response are further
weakening growth and employment prospects, making fiscal adjustment and the
repair of financial sector balance sheets all the more challenging.
The United States
economy is also facing persistent high unemployment, shaken consumer and
business confidence and financial sector fragility. The European Union (EU) and
the United States of America
form the two largest economies in the world and they are deeply intertwined.
Their problems could easily feed into each other and result
in another global recession. Emerging countries, which had rebounded strongly
from the global recession of 2009, would be hit through trade and financial
channels.
The financial turmoil following the August 2011 political
wrangling in the United States regarding the debt ceiling and the deepening of the Euro
zone debt crisis also caused a contagious sell-off in equity markets in several
major developing countries, leading to sudden withdrawals of capital and
pressure on their currencies.
Political divides over how to tackle these problems are
impeding much needed policy action, further eroding the already shattered
confidence of business and consumers. Such divides have also complicated
international policy coordination.
Nonetheless, as the problems are deeply intertwined, the
only way for policymakers to save the global economy from falling into a
dangerous downward spiral is to take concerted action, giving greater priority
to revitalizing the recovery in output and employment in the short run in order
to pave the way for enacting the structural reforms required for sustainable
and balanced growth over the medium and long run.
Faltering Global Growth
Surrounded by great uncertainties, the Oseme Consulting
baseline forecast is premised on a set of relatively optimistic conditions, including
the assumption that the sovereign debt crisis in Europe will, in effect, be
contained within one or just a few small economies, and that those debt
problems can be worked out in more or less orderly fashion.
It further assumes that monetary policies among major
developed countries will remain accommodative, while the shift to fiscal austerity in
most of them will continue as planned but not move to deeper cuts.
The baseline also assumes that key commodity prices will
fall somewhat from current levels, while exchange rates among major currencies
will fluctuate around present levels without becoming disruptive.
In this scenario, growth of world gross product (WGP) is
forecast to reach 2.6 per cent in the baseline outlook for 2012 and 3.2 per cent
for 2013. This entails a significant downgrade (by one percentage point) from
the Oseme Consulting baseline forecast of mid-20111but is in line with the
pessimistic scenario laid out at the end of 2012.
The deceleration was already visible in 2011 when the global
economy expanded by an estimated 2.8 per cent, down from 4.0 per cent
in 2010. The risks for a double-dip recession have heightened.
In accordance with a more pessimistic scenario, including a
disorderly sovereign debt default in Europe and more
fiscal austerity, developed countries would enter into a renewed recession and
the global economy could come to a near standstill.
More benign outcomes for employment and sustainable growth
worldwide would require much more forceful and internationally coordinated
action than that embodied in current policy stances.
Emerging countries and economies in transition are expected
to continue to stoke the engine of the world economy, growing on average by 5.6 per cent
in 2012 and 5.9 per cent in 2013 in the baseline outlook.
This is well below the pace of 7.5 per cent achieved
in 2010, when output growth among the larger emerging economies in Asia
and Latin America such as Brazil ,
China and India
were particularly robust.
Even as economic ties among emerging countries strengthen, they
remain vulnerable to economic conditions in the developed economies. From the
second quarter of 2011, economic growth in most emerging countries and
economies in transition started to slow notably to a pace of 5.9 per cent
for the year.
Initially, this was the result, in part, of macroeconomic
policy tightening in attempts to curb emerging asset price bubbles and
accelerating inflation, which in turn were fanned by high capital inflows and
rising global commodity prices.
From mid-2011 onwards, growth moderated further with weaker
external demand from developed countries, declining primary commodity prices and
some capital flow reversals. While the latter two conditions might seem to have eased
some of the macroeconomic policy challenges earlier in the year, amidst increased
uncertainty and volatility, they have in fact complicated matters and have been
detrimental to investment and growth.
The economic woes in many developed economies are a major
factor behind the slowdown in emerging countries. Economic growth in developed
countries has already slowed to 1.3 per cent in 2011, down from 2.7 per cent
in 2010 and is expected to remain anemic in the baseline outlook at 1.3 per cent in 2012
and 1.9 per cent in 2013. At this pace, output gaps are expected to remain significant and
unemployment rates will stay high.
Most developed economies are suffering from predicaments
lingering from the global financial crisis. Banks and households are still in
the process of a deleveraging, which is holding back credit supplies.
Budget deficits have widened and public debt has mounted, foremost
because of the deep downturn and to a much lesser extent, because of the fiscal
stimulus. Monetary policies remain accommodative with the use of various unconventional
measures, but have lost their effectiveness owing to continued financial sector
fragility and persistent high unemployment which is holding back consumer and investment
demand.
Concerns over high levels of public debt have led governments
to shift to fiscal austerity, which is further depressing aggregate demand.
Growth In The United
States
Growth in the United States
slowed notably in the first half of 2011. Despite a mild rebound in the third
quarter of the year, gross domestic product (GDP ) is
expected to weaken further in 2012 and even a mild contraction is
possible during part of the year under the baseline assumptions.
Even as the total public debt in the United
States has risen to over 100 per cent
of GDP , yields on long-term government bonds
remain at record lows. This would make stronger fiscal stimulus affordable, but
politically difficult to enact in a context where fiscal prudence is favored
and where the country has already been on the verge of defaulting on its debt
obligations in August of 2011 because of political deadlock over raising the
ceiling on the level of Federal public debt.
Failure by the congressional Joint Select Committee on
Deficit Reduction to reach agreement in November of 2011 on fiscal
consolidation plans for the medium term has added further uncertainty.
The uncertain prospects are exacerbating the fragility of
the financial sector, causing lending to businesses and consumers to remain anemic.
Persistent high unemployment at a rate of over 8.0 per cent and low
wage growth are further holding back aggregate demand and, together with the
prospect of prolonged depressed housing prices have heightened risks of a new
wave of home foreclosures.
Growth In Europe Union
Growth in the Euro zone has slowed considerably since the
beginning of 2011 and the collapse in confidence evidenced by a wide variety of
leading indicators and measures of economic sentiment suggest a further slowing
ahead, perhaps to stagnation by the end of 2012.
Even under the optimistic assumption that the debt crises
can be contained within a few countries, growth is expected to be only
marginally positive in the Euro zone in 2012, with the largest regional economies
dangerously close to renewed downturns and the debt-ridden economies in the
periphery either in or very close to a protracted recession.
Growth In Emerging Nations
Emerging countries are expected to be further affected by the
economic woes in developed countries through trade and financial channels. Among
the major emerging countries, China ’s
and India ’s GDP
growth is expected to remain robust, but to decelerate.
In China ,
growth slowed from 10.4 per cent in 2010 to 9.3 per cent in
2011 and is projected to slow further to below 9 per cent in 2012-2013.
India ’s economy
is expected to expand by between 6.7 and 7.1 per cent
in 2012-2013, down from 9.0 per cent in 2010.
Growth of the Mexican economy slowed to 3.8 per cent
in 2011 (down from 5.8 per cent in 2010), and is anticipated to
decelerate further, to 2.5 per cent in the baseline scenario for 2012.
Least Developed Countries
Low-income countries have also seen a slowdown, albeit a
mild one. In per capital terms, income growth slowed from 3.8 per cent
in 2010 to 3.5 per cent in 2011, but despite the global slowdown, the
poorer countries may see average income growth at or slightly above this rate
in 2012 and 2013.
The same holds for average growth among the category of the
least developed countries (LDCs). Nonetheless, growth is expected to remain below
potential in most of these economies.
In 2012, per capita income growth is expected to reach
between 2.0 and 2.5 per cent, well below the annual average of 5.0 per cent
reached in 2004-2007. Despite the high vulnerability of most LDCs to commodity
price shocks, they tend to be less exposed to financial shocks and mild growth
in official development assistance (ODA) has provided them with a cushion against the global slowdown.
Conditions vary greatly across these economies. Bangladesh and several of the LDCs in East Africa are showing strong growth, while adverse
weather conditions and/or fragile political and security situations continue to
plague economies in the Horn of Africa and in parts of South and Western Asia.
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control ©
2012 Oseme Group
0 comments:
Post a Comment