Jed Brewer, economist and senior vice president of Finance & Resource Management Consultants, on the fall out of the global recession and likely ending.
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Jed Brewer: global recovery
will follow the IMF timetable |
As we know all too acutely, the global economy has changed course spectacularly since a sequence of bank failures and consolidations in the United States triggered a global financial crisis in September 2008.
In hindsight, the crisis appeared to be like a volcano waiting to explode. Pressure had built for a decade or more from a worldwide credit boom facilitated by relatively low long-term interest rates and aggressive risk-taking.
The troubles in the US that were emblematic of problems in many other countries served as a convenient catalyst to unleash the mounting pressure. The resulting explosion has not been pretty.
In much of the developed world, consumers have retrenched realising the need to start saving a greater portion of their disposable income and business investment has waned as credit has become scarce and the expectation of strong future demand has dimmed.
Real GDP in the US contracted 6.3% on an annual basis in fourth quarter 2008 and is expected to be down another 5% first quarter 2009.
Real GDP was down 1.6% in the UK in fourth quarter 2008 and will likely be negative again in first quarter 2009.
Disturbingly, Japan saw real GDP decline 12.1% in fourth quarter 2008. With exports in February down nearly 50% from 12-months prior, it will likely experience a similar sized contraction in early 2009. The magnitude of the decline in Japan’s numbers is mind numbing.
Roughly seven months since the volcano erupted, the questions now on many people’s minds are how long will the global recession last and how deep will it be?
The answers to those questions are still unclear. The International Monetary Fund (IMF) released its latest forecasts. It sees the global economy contracting by 0.5 to 1% in 2009 (a growth rate of less than +3% is considered a global recession) before returning to growth in 2010.
But this highlights the inherent difficulties in economic forecasting. Less than 12 earlier, the same organisation projected global growth of fewer than 4% in 2009. Growth of 4% seems like a wishful fairytale today.
I am hopeful a recovery will begin in the US in the latter part of 2009 given the swift and expansive monetary and fiscal stimulus employed there. But I am skeptical if such a quick recovery can be expected in many other countries across the globe.
For one, most countries started their slides after the US. Therefore, I expect their recoveries to trail the US’s as well.
Secondly, and perhaps more importantly, many countries lack the governmental infrastructure to respond timely and decisively, albeit imperfectly, to the problems they are facing and consequently have been left waiting for others to make decisions on their behalf.
Eastern Europe is an unfortunate example. Debt default problems in many of these developing heavily export-dependent countries are even greater as a percentage of GDP than the problems in the US. Much of its shaky debt is held by banks in Western European countries already dealing with internal problems. Where will the funds come from to cover these debts if and when they default?
The European Central Bank (ECB) is a relative infant in handling cross-border issues of this magnitude. How effective will it be in withstanding internal pressures and making tough decisions, which may come at the expense of a sovereign member nation?
And thirdly, trade is a more substantive component of global economic well being than ever before. To what degree will populist movements in suffering countries, under the ideology of ending domestic pain, gain a foothold in governments that leads to the implementation of protectionist policies?
History reminds us that protectionist policies, while on the surface often appealing, only tend to worsen the pain for all. The rhetoric of the G-20 Summit, held the first week of April, may provide an indication of the resolve of nations to fight populist pressures.
Overall, I continue to be hopeful that a global economic recovery will take place according to the IMF timetable. But downside risks still remain present.
Constructive handling of further global de-leveraging and considered international political co-operation are necessary to getting us back on the road of economic growth and far away from the remnants of the volcano that almost all of us failed to see building.
Dr Jedidiah Brewer is vice president of FRMC, Inc.