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Global Economic Recovery

Global Economic Recovery

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Published by: d4debojit on Aug 05, 2009
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08/20/2010

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Global Economic Recovery: Plausible Signs
Just a year ago, it was hard to believe that a US-originated crisis would ever engulf the entireglobal economy; in the same way, it is harder now to believe that it is bottoming out so early afterthe worst economic crisis since the World War II.Even for an intransigent optimist, it would have been impossible to fathom a global recovery within just a year or two after the worst financial crisis, which originated in the US but soon hit theeconomies of the world hard about a year ago. But now a sense of optimism is prevailing that thecrisis is nearing its end and that a recovery is not very far off. "World growth can turn positive bythe end of this year, and unemployment can start decreasing by the end of next year," said OlivierBlanchard, IMF's Chief Economist. However, it will be a while before the world leaders takecorrective actions to help a battered economy recover from what he calls competing crosscurrents,with the collapse in confidence and demand continuing to pull the economy down and governmentstimulus measures and natural stabilization mechanisms pulling the economy up. "This is not thetime for complacency, and the need for strong policies, both on the macro and especially on thefinancial fronts, is as acute as ever," he added.But don't expect a uniform, an across-the-board recovery. Strangely, the US which was at theepicenter of the crisis, is expected to recover faster, while in Europe where banking sector washurt more (than in the US) it could take longer than expected. "The shock originated in the US,but Europe is paying a higher price,"
New York Times
quoted Jean Pisani-Ferry, a former topfinancial adviser to the French government who is now director of Bruegel, a research center inBrussels, as saying. In its latest World Economic Outlook (April 2009), IMF forecasts Euro economyto shrink by 4.2%, much ahead of US which is forecast to contract by 2.8% and the averagecontraction of 3.8% for the advanced economies.The explanation, to the puzzle of Europe's relatively slower recovery as compared to the US, lies inthe contrasting approach taken by the respective leaders of the two regions, suggest a section of economists. Whilst, as experts say, the US has gone for more aggressive approach by launchingstimulus packages worth billions of dollars and pressurizing banks to open up their purse strings,in comparison, Europe has largely remained conservative and hesitant.But even amidst what critics call muted optimism, it would be too early to say that this (recovery)is entirely due to bailouts and improved liquidity. "Past episodes of financial crisis have shown thatdelays in tackling the underlying problem mean an even more protracted economic downturn andeven greater costs, both in terms of taxpayer money and economic activity," the IMF report said.
Gradual and painful
But some experts say that the crux of the issue is not when the recovery is expected to set in, butthe intensity of the growth recovery once it bottoms out—will it be a robust or weak one is turningout to be a million dollar question. The ongoing synchronized economic slowdown has not come toan end, however, analysts predict an early revival only next year, even as challenges remain. Forexample, the fast shrinking economies of Europe, followed by Mediterranean members, pose amajor hurdle for early recovery worldwide, as the shortage of capital in European banks isexpected to outlast their American counterparts, affecting the overall revival process. Sharp snapbacks are expected in the early 2010, propelledby massive policy boost and inventory cycle,resulting in short-term growth, however, some experts are concerned that strong bailouts mayimpact the prospects in the post-revival phase. According to Robert Zoellick, President, WorldBank, the recovery would be a gradual and painful one, due to slack capacities of the industries,thus elevating the degree of uncertainty and risk. Even with the stabilization of financial markets in
 
many developed economies, unemployment and underutilization of capacity continue to rise,putting downward pressure on the global economy. The World Bank projects the global economyto decline this year by close to 3%, with most developing economies expected to contract this yearand face increasingly bleak prospects unless the slump in their exports, remittances, and foreigndirect investment is reversed by the end of 2010. "Although growth is expected to revive duringthe course of 2010, the pace of the recovery is uncertain and the poor in many developingcountries will continue to be buffeted by the aftershocks," Zoellick said ahead of the Group of EightFinance Ministers meeting in Italy.
 
Economists believe that this is the crisis of over-leverage and over-spending, and to counter it,effective steps like aggressive monetary and fiscal easing are necessary to prevent a severerecession, triggered by excess lending, from turning into near depression. The WEO report by IMFsuggests, "The greatest policy priority at this juncture is financial sector restructuring. Convincingprogress on this front is crucial for an economic recovery to take hold and would significantly

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