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.
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.
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.
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.