Deepening global recession

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The news on the world economy is quite depressing. The World Trade Organisation (WTO) in its latest assessment has slashed its 2012 global trade outlook, citing the eurozone debt crisis and weak growth in the US and China as key factors. Global trade was now expected to grow by 2.5 percent in 2012 as compared with the previous forecast of 3.7 percent while its outlook for next year was also revised downwards from 5.6 percent to 4.5 percent.

The WTO's revised projections came as the data showed that global trade volume grew just by 0.3 percent in the second quarter of 2012, significantly slower than the 1.2 percent seen in the previous three months. According to a statement by the WTO, "the global economy has encountered increasingly strong headwinds since the last WTO Secretariat forecast was issued." Output and employment data in the US had continued to be disappointing while managers' purchasing indices in China pointed to a slower growth in the economy of world's largest exporter. The European sovereign debt crisis had not abated, making fiscal adjustment in the peripheral euro area economies more painful and stoking volatility.

Speaking in Singapore on 21st September, 2012, WTO's Director General, Pascal Lamy said the revised trade outlook was not surprising given the strains facing the global economy. The world growth was slowing down more than the WTO had expected only a few months back. Lamy called for more to be done to boost global growth, on top of recent measures to buy up government bonds announced by the central banks of the US, Europe and Japan. Although, recently-announced measures to reinforce euro and boost growth in the US were welcome, a renewed commitment was needed to revitalise the multilateral trading system in order to restore economic certainty. Unfortunately, however, there were already signs pointing to governments bowing to pressures to adopt protectionist measures and the WTO chief cautioned against such a move and asked the world leaders to support the multilateral trading system.

At a time when most of the analysts were expecting a revival in world trade and the global economy as a result of various initiatives by the authorities in the US, Eurozone and Japan, the latest projections by the WTO that recession was still deepening and growth in world trade was likely to be much slower than expected would come as a surprise and strengthen the belief that standard/classical policy measures were inadequate to get over the present crisis. In fact, contrary to the previous universal acceptance of Keynesian model, there is now a frenzied debate about its appropriateness in the current circumstances.

The argument is now increasingly made that Keynesians who are now entrenched and dictate policies in most of the countries don't allow the economies to go through the normal, albeit painful, process of restructuring and debt reduction but opt for convenient path of money printing to overcome the crisis. Such a policy strategy could buy time but would fail to improve the world economy in the long run. Quantitative easing (QE) or stimulus through printing of currency, which such policies imply, could, therefore, be counterproductive. Also, there is a growing realisation that central banks could generally forestall financial panic, and keep the zombie banks alive but cannot bring an economic recovery at their own and resolve other deeper problems. The present policy framework could, therefore, help prop up the banks' balance sheets but cannot help the real economy to recover on a sustainable basis. The implication of this counter narrative is unfortunately the acceptance of the reality of prolonged recessions and the consequent suffering on a large scale in a free market economy, which the political leadership and the general public should be prepared to accept and tolerate. We know that there are no guaranteed solutions but a way has to be found soon to extricate the world from the current dilemma and also ensure that the future generations are not overburdened due to our flawed policies.

The delay to deal properly with recession could be very costly in terms of increasing protectionism the world over and for the developing countries in particular. In a difficult situation like this, what the governments in developed countries could at least do is a practical reaffirmation of their commitment to international trade co-operation and support for an open trading system. Such a declaration could help the process of global growth to a certain extent as well as reassure the poorer economies that their trade, aid and other transfers would not be adversely affected by unilateral actions by the advanced economies. What is more worrying is that all the multilateral institutions are in agreement about the deepening of recession. The IMF Managing Director has also said that their global growth forecasts to be published on 9th October, are going to be lower than their projections in July 2012, necessitating more action to fight for the weakening global economy in order to restore its health.

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