Monday, December 29, 2008

How will future economic growth be affected?

Sunday Stabroek, feature column GWW, Sunday 28 December 2008
Guyana and the wider world
BY Dr Clive Thomas
Published: December 28, 2008 in Features
, Sunday

How will future economic growth be affected?
V, U, or L-shaped growth curve

Following last week's column, I shall discuss this week the impact of the
financial crisis and credit crunch on the prospects for economic growth
performance in the United States, the broader global economy, and Caricom. I
will start the discussion on Caricom in next week's column.
At this juncture, economists are pointing out that it makes a big difference
whether the chart or curve for future GDP growth in the developed countries
takes the shape of a V, U or L. In the first instance, the V shape indicates
a relatively sharp decline of economic growth into recession and an equally
sharp revival in economic fortunes, after a very limited period at the
bottom of the curve.
In the case of a U shaped curve, as the letter indicates, the economic
decline is steep and the revival, when it comes is also steep. However, the
time spent in recession at the bottom of the curve is much more prolonged
than in the previous example of the V shaped curve.
The L shaped curve is normally indicated as an elongated L. Here the stay in
recession (after the precipitous economic decline) is protracted. The
economy finds it very difficult to overcome the downward drag on its growth,
incomes and employment and the recession therefore, persists.
With these possibilities the most optimistic forecast out there is that
recovery from the recession in the developed economies will not be underway
before the start of the second decade (2010).
Monetary, fiscal and trade policies
It is concern over a protracted depression that drives the coordinated
global effort to utilize monetary, fiscal and trade measures to stimulate
global growth. Monetary measures have taken the form of reduced interest
rates and the stimulation of bank lending. Global interest rates are now at
record low levels. The present Fed Rate, at a quarter-of-one per cent, is
the lowest rate ever for the US.
Fiscal measures have taken the form of both tax cuts and beefed-up spending
by governmental authorities. The fiscal stimulus packages in the US and
Europe, discussed last week, signify the magnitude of this effort. The
International Financial Institutions (IFIs) have also concentrated on
increased availability of funding for social, infrastructural, and poverty
programmes in developing countries.
Trade measures, under WTO-guidance have been coordinated to ensure that
countries do not restrict imports or subsidise exports in an effort to
confer preferment or advantages to their domestic producers. Such policies
are called 'beggar thy neighbour policies' and were major contributory
factors to the prolongation and depth of the Great Depression of the 1930s.
To sum up, there can be little doubt at this stage that the global economy
has already suffered major reverses in its real sectors, stemming from the
financial crisis and credit crunch. Moreover, there is every prospect that
these negative outcomes will intensify.
Spread of economic difficulties
Even high-flying economies with stellar growth rates have been badly
impacted by the economic reverses. For example, China's economy has had the
most explosive growth over the past three decades. This growth, however, has
been export-based, and dependent on the US market. The recession has already
hurt sales of Chinese manufactures in the US, leading to a deceleration of
China's economic growth prospects.
There are two important barometers of expectations for future global growth.
Firstly, the behaviour of securities prices on the various global stock
exchanges. And, secondly, oil prices in the world market.
In so far as stock exchanges reflect future expectations about the
performance of national and global economies, the trend in stock prices
tends to be a good guide to the level of economic uncertainty among
investors. In recent months global stock exchanges have shown exceptional
volatility, even as overall indices of prices have trended downwards. Record
swings in these indices have been recorded on all the major stock exchanges
leading regulatory authorities to impose restrictions on investor behaviour.
In the case of Russia, its stock exchange was temporarily closed!
If stock exchanges have been exceptionally volatile, the behaviour of oil
prices on the world's commodity markets has been equally extraordinary. A
year ago no one would have forecast that the price of a barrel of oil would
reach US$150 by the third quarter of this year. Equally, no one could have
imagined that it would fall precipitously to around US$40 per barrel, in the
space of a few months!
While stock exchange volatility indicates the underlying uncertainty about
the economic future, the drastic decline in oil prices indicates the near
certainty in the expectations of investors that the world is facing a very
serious recession. With recession and the decline in economic activity, the
demand for energy as an input is certain to fall. The price decline in the
oil market has factored in this expectation.
In some ways the most disheartening consequence of the financial crisis and
credit crunch and their spill-over to the real economy has been to put on
the back-burner of global attention, three very crucial global emergencies.
The first of these is the food crisis. I have considered this at some
length, previously in these Sunday Stabroek columns. The second is the
related problem of poverty, nutrition, hunger, homelessness, and deprivation
that the Millennium Development Goals have targeted for global eradication.
The third is the issue of climate change and the global commitment to secure
inter-generational equity, through preserving the sustainability of the
natural environment for future generations.
Next week I will continue the discussion from this point.

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