The global economy is still in danger

Tue, 6 Apr Pre-Open

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Has the global economy come out of its slump? Will it witness a W-shaped recovery? When should various governments withdraw the fiscal stimulus? These are some of the important questions that have given everybody across the world food for thought. And while the answers have not been easy, they have certainly been varied. After all, it is difficult to take a call as to when the global economy will once again witness those glory days before the crisis erupted. Infact, many are of the view that we may never see those days again and will have to contend with a new normal.

While many noted economists have expressed opinion on the subject, the IMF chief Dominique Strauss-Kahn has also ventured forth his view. Which is that the global economy is not completely out of the woods yet. Sure, some signs of recovery have been evident. But those have been more a product of government spending and support rather than demand from the private sector. Infact, if one takes a look at the US, the small recovery signals that have been observed have been largely a result of government stimulus measures. Demand there has been quite subdued due to reduced incomes and a high rate of unemployment.

Thus, while there are talks about a double dip recession doing the rounds, the IMF chief also acknowledges that the same cannot be ruled out. At the same time, the IMF has not predicted such a double dip recession over the next two years. Infact, as reported in a leading business daily, the IMF has estimated that the world economy would expand by 3.9% in 2010 and this will ramp up to 4.3% in 2011.

Then many countries have another problem to contend with: a rising fiscal deficit. This is visible not only in a developed country like the US but also an emerging economy like India. The US intends to follow an expansionary monetary policy for an extended period of time. It has argued that inflation is not really a problem for the time being given that demand is depressed. But as and when the US recovers and the Fed does not do much in terms of tightening its purse strings, then higher inflation and the perils that it brings along with it will be another problem that the US will have to deal with.

The emerging economies also have their own set of problems despite the fact that they are touted to grow much faster than their developed peers. China runs the risk of fuelling higher inflation given the huge stimulus measures pumped into its economy and the indiscriminate lending by banks to asset classes such as real estate where a bubble has already begun to form. India has been plagued by a rising fiscal deficit along with higher inflation, which poses many problems for the Indian government.

Thus, it seems increasingly likely that the world economy will not revert to those heady days but will have to settle for a new state of things. Even if some of the pressing concerns get resolved in the near future there could be graver risks lurking around the corner. This means that governments and central banks will have to make some important decisions in the months to come if another crisis of the scale we have witnessed has to be prevented going forward.