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.
Back-burner
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.