Are global economic problems over?

Tue, 29 Mar Pre-Open

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The worst impact of the global financial crisis may be behind us. But one cannot say with certainty that the fortunes of the global economy have improved for the better. If anything various events have taken place in recent times that have increased the level of uncertainty even further.

For instance, let's begin with the debt crisis from Europe which seems to be far from over. Portugal's plan for austerity measures got turned down recently and there are concerns with respect to possible write-downs on Irish bank debt. Europe so far has been addressing this problem by injecting liquidity into the system, which really works as a short term solution. The region is loaded with debt and while adopting austerity measures seems like the only way of bringing this debt down, it will also hamper growth. This means that the European economies will take a much longer time to recover overall.

The revolutions in the Middle East have also increased the worries of global investors. What began as an uprising in Tunisia, escalated in Egypt and has not evolved into a full blown crisis in Libya. Bahrain has also witnessed the makings of a revolution. Indeed, with the Middle East accounting for a larger pie of the total oilfields in the world, it is only natural that fears have been sparked of higher crude prices. For the developed world especially crude accounts for a larger part of the bill as compared to food and hence rise in oil prices is bound to have some impact on economic growth. That said, revolutions so far have occurred in those Middle East countries whose contribution to oil production is not that high and the crisis could reach a head if unrest begins to stir in Saudi Arabia.

The earthquake and tsunami in Japan and the consequent damage to the nuclear plants there has put severe pressure on an economy which had been battling depression for quite some time now. The economic damage as a result of this natural disaster is massive. Too top it all, debt in Japan has been considerably higher too. This means that the Japanese government's solution to inject more liquidity into the economy only means government's finances will be strained further.

Which is why emerging countries such as India and China whose economies have been growing nicely are expected to lend some balance to global growth. But they have been besieged by problems too notably overheating and inflation. As a result, governments there have been raising rates to tame inflation. Thus, although growth in these regions will still be higher than the developed world, it is likely to slow down a bit especially in China.

All in all, the global economic scenario for the time being seems fraught with risks and uncertainties and the increased volatility in the global stock markets only underscores this point. Indeed, the very uncertainty with respect to overall future outlook could be the biggest worry of all.