This analysis of the recent rapid increases in global food and fuel prices along with the strong surge in bio-fuels production and their combined impact on the Guyanese economy would be incomplete without taking into account major uncertainties that have been confronting the global economy in recent times. These uncertainties are both cause and effect of the problems we have been discussing. One of these in particular, has been the near universal downgrading of projected economic performances for the global economy for the rest of this year and well into 2009. This is supported by the fact that the economic authorities in each of the seven largest economies in the world presently project a slowdown in economic performance or worse, possibly recession, for the period up to the end of 2009.
Impact of the US slowdown
Data released at the end of July by the US Commerce Department notes that contrary to their earlier estimates of positive growth, the United States economy did suffer negative growth (minus 0.2 per cent) during the last quarter of 2007. This was corrected. However, for the first quarter of 2008, the estimated growth rate was only 0.9 per cent. And, for the second quarter of 2008, it was 1.9 per cent. This signals a slowdown in economic activity for the United States, which is particularly disconcerting. The reason being United States’ economists estimate that, given the country’s workforce and its productivity, GDP must grow by an annual rate of more than 2.5 per cent in order to prevent 1) job-losses 2) a rise in the unemployment ratio and 3) with a weakened labour market, a tendency for wages to fall. Such developments mean bad news for the rest of the world.
The improvement in US second quarter economic performance no doubt reflects the impact of President Bush’s stimulus cheques on consumption expenditure. It has been estimated that in real terms personal incomes in the US grew by 1.1 per cent in the last quarter. Consequently, consumption expenditure seemed to have accounted for more than half of the total growth in the second quarter of 2008 (1.9 per cent). At the same time, however, investment spending and inventories showed in contrast a sharp decline.
All this is important for us in Guyana because the USA is such a major player in the global economy that any slowdown there is bound to have serious repercussions elsewhere. Indeed, even the world’s fastest growing economy, China, exports so much of its output to US markets that any weakening of those markets will have very adverse reverberations on the Chinese economy. This situation is true also for our Latin America and Caribbean region, for which the USA is their largest external market, by far.
World economy projections
It is not surprising that recent projections of global economic performance by the United Nations indicate a significant slowdown worldwide. Real GDP growth for the ‘developed’ countries is projected at less than 1 per cent for the years 2008 and 2009. Africa, which had robust growth of 5.2 per cent in 2007, is projected to fall to 1.1 per cent growth for 2008-2009. The ‘least developed economies’ as a group, which had even better growth at 6.5 per cent in 2007, is projected to decline by one and a half percentage points to 5.2 for 2008-2009. East and South Asia, which has had a stellar growth rate of over 11 per cent in 2007, is also projected to see this decline to 8.5 per cent.
There is growing concern that there will be a contagion effect from the USA of the slowdown, into other developed economies cascading into a dangerous downward spiral of global recession and depression. There is also a looming threat of a simultaneous upward surge in global prices. This would lead to global stagflation, or in other words a spiral of both rising prices and falling production and incomes globally.
Inflation risk
So far in the USA inflation has been concentrated on food and fuel prices, with relatively little spillover into other market segments. Unfortunately, however, the US economic authorities have little room to manoeuvre in addressing the sources of rising food and fuel prices as much of it is imported. Thankfully, the market based core inflation rate for the USA has risen by less than 2 per cent for the first two quarters of this year, when compared to 2007.
The difficulty the US faces is centred on the fact that measures designed to combat inflation (such as increased interest rates) would exacerbate the slowdown in economic growth, producing the most dangerous of all macroeconomic occurrences, that of stagflation.
Financial concerns
Of course the US economy and, for that matter, most economies worldwide, in addition to the grave threats of rising food and fuel prices, face financial crises as well. These originated in the USA with the notorious scandals over sub-prime loans in US mortgage and residential markets. Some analysts estimate as much as US$11 trillion are at risk in financial institutions linked directly or indirectly to the mortgage market. The two US institutions, (Freddie Mac and Fannie Mae) most directly linked to the mortgage market have enormous exposure, as over 1 million US households have been already affected by the threat of default and foreclosure. A government bail-out seems almost inevitable in order to save these two institutions from going under.
This brief snapshot of the global economic scene heightens the anxieties and concerns we should have over the prospects for the Guyanese economy for the rest of this year, and into 2009. Other factors, however, need to be taken into account and I will address these next week in my final column on this topic.
