The world may be heading for its worst recession in a quarter of a century – if it’s lucky.
A steep slump looks likely as the credit squeeze crunches economies from the US to Singapore and panic engulfs global financial markets.
“It’s certainly going to be the worst since the 1980s,” says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the US Treasury Department from 1993 to 1995. “The hope is that it won’t become the worst unemployment business cycle since the Great Depression.”
Of special concern: The two big bulwarks of the global economy in recent years – US consumer spending and the rapid growth of emerging markets – may be finally giving way in the face of the 14-month-old financial turmoil.
That raises the odds that the coming economic decline will be long and deep, despite US Treasury Secretary Henry Paulson’s US$700 billion financial rescue plan, similar efforts by European leaders and the coordinated interest-rate cuts engineered by Federal Reserve Chairman Ben S. Bernanke and other central bankers last week.
“This is the worst crisis I’ve seen in my 50-year career,” William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington Monday. “We still have to deal with the effects on the real economy here and elsewhere.”
Slowing growth
The International Monetary Fund (IMF)‘s World Economic Outlook last week forecast that global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund’s informal definition – growth of 3 percent or less – although current IMF chief economist Olivier Blanchard declined to describe it as such.
One of his predecessors wasn’t soshy. “It’s hard to imagine it not being the worst recession in at least 25 years,” says Kenneth Rogoff, who is now a professor at Harvard University in Cambridge, Massachusetts.
“You can take most of the official forecasts for 2009 and knock two” percentage points off of them, he adds. That would make it the worst slump since 1982, when the world economy grew 0.9 percent.
“We’re heading into a global recession,” Simon Johnson, also a former IMF chief economist and now a senior fellow at the Peterson Institute for International Economics in Washington, said last month.
Rate-cut pressures
Stocks rallied worldwide Monday after European governments announced measures to shore up financial institutions and central banks pumped unlimited dollar funds into the money markets. The MSCI World Index, which plunged 20 percent last week, rose 2 percent.
Even if the financial markets settle down soon, the deepening decline will put pressure on central bankers to cut interest rates further and on finance ministers to reduce taxes and boost spending.
“There will be more cuts out of all of the central banks,” says Ethan Harris, economist at Barclays Capital Inc. in New York. “We are looking at a global recession, and it isn’t going to turn quickly.”
US lawmakers, who already enacted one economic-stimulus package this year, will reconvene after the November 4 presidential and congressional elections to consider another.
Stimulus
“We are going to do a stimulus,” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said Sunday on the ABC News television program “This Week.”
The US, where the two-and-a-half-year-old nosedive in the housing market is now taking down the rest of the economy, is the epicenter of the global slump. Gross domestic product contracted in the third quarter and is set to shrink further in the fourth, according to a survey of 52 economists by Bloomberg News this month.
Consumer spending, after growing uninterruptedly since 1991, finally gave way last quarter in the face of rising unemployment, declining wealth and tightening credit.
Further weakness seems to be in store. The jobless rate, already at a five-year high of 6.1 percent, may rise to 8 percent, says Jan Hatzius, chief US economist at Goldman Sachs Group in New York. That would bring the cumulative increase in unemployment during the recession to 3.5 percentage points, second in the post-World War II era only to the 4.1-point increase recorded in the mid-1970s.
Ripples
Household finances are also being pinched. The steep decline in US stock prices last week alone wiped some $2.16 trillion from investors’ wealth. And banks are getting stingier with credit: Borrowing by US consumers fell in August by the most on record as lenders shut access to loans, according to data from the Fed.
The consumer pullback is already sending ripples throughout the economy. Vacancies at US neighborhood and community shopping centers rose to a 14-yearhigh in the third quarter, New York-based real-estate research firm Reis says.
A sharp reduction in household spending could turn what is shaping up to be the biggest recession since the early 1980s into something worse, Bruce Kasman, chief economist at JPMorgan Chase & Co. told a meeting of the Institute for International Finance in Washington Sunday.
Market cracks
Cracks are also showing up in the emerging markets, until now the dynamos of the world economy. The MSCI Emerging Markets Index fell 20 percent last week as global investors yanked money from countries such as Brazil and Russia.
Michael Mussa, another former IMF chief economist now with the Peterson Institute, says he has cut his forecast for emerging-market and developing-country growth next year to below 5 percent from 5.7 percent just two weeks ago. That would be the slowest since the Asian financial crisis in 1998 and would compare with an IMF projection of 6.9 percent growth for this year.
“The credit crunch has taken hold in emerging markets, particularly in central Europe and now in Latin America,” Mexican central bank Governor Guillermo Ortiz said Sunday. “This has happened in a few weeks, even days.”
Brazilian Budget Minister Paulo Bernardo said in an interview published Sunday by O Globo newspaper that the government may cut spending and postpone social programs as the financial crisis takes its toll on the economy.”
Source : Thanh Nien Daily
