Little room for complacency

The OECD, which brings together the governments of countries committed to democracy and the market economy, has been quick to grab a few positive signs in short-term indicators to declare that the global economic freefall has bottomed out.

Is the world economy really out of the woods? It is true that investor and consumer confidence is picking up as are share prices. But this recession, the deepest and broadest since World War II, continues to challenge conventional economic thinking. Some analysts are talking about a process of "de-globalisation". The colossal interventions by rich world governments, whose deficits this year will go up to nine per cent of GDP, seem to have averted the collapse of the financial system. This has been about management crisis not clock-tower building. The banking sector itself remains extremely fragile. The exact losses due to "toxic assets" held by the banks are unknown. In its Global Financial Stability Report (2009), the IMF has revised them upwards to $4 trillion.

Moreover, recovery in the "real" economy is being jeopardised by the ongoing reluctance of banks to lend to businesses and consumers. This is aggravating the fall in demand for capital as well as housing and durable consumer goods, purchases that are normally made on credit. By contrast, private consumption is holding relatively well indicating that consumers are reluctant to cut back on their day-to-day requirements. Disposable incomes have fallen (less overtime, reduced working hours etc ) but this has been partly offset by lower inflation (projected at one per cent in the EU).

The biggest economic threat now is from ever higher unemployment. Fear of losing one's job has led to increased savings (normally a good thing), which has only worsened the severity of the recession.

The pain of the recession is not being shared equally, neither among nations nor citizens. A five per cent drop in GDP does not imply that each one of us has five per cent less to spend; relatively few people will carry most of the burden. Some may have access to some sort of safety net, others no. This is especially the case with millions of people in poor countries. The World Bank estimates that an additional 200,000 to 400,000 infants could die around the world per year between 2009 and 2015 as a result of the recession. These poor countries are now euphemistically referred to as "emerging economies". This year, these economies have $1.8 trillion borrowings, which they need to roll over. Inflows of foreign aid and direct investment as well as private capital into these economies are dwindling at a time when their tourism and exports are slumping, leading to major cash flow crises.

Emerging economies such as China and India seem to be doing relatively well with projected 2009 growth rates of six per cent and four per cent respectively. China's exports this year have fallen by 24 per cent, leading to 20 million job losses. The high-degree of central management of the economy and its strong foreign exchange position has enabled the country to act fast, pushing fixed asset (infrastructure) investment and stimulating domestic consumption. Asia is expected to lead the way out of the crisis.

Among the advanced economies, the EU and Japan are the biggest losers. This year, the EU's GDP is now expected to fall by four per cent. Robert Kagan's thesis of Europe being Venus and America being Mars is being vindicated even in the economic sphere.

The US, the primary culprit for the global crisis, has once again moved fast and decisively while the EU keeps dawdling. Led by Germany, the EU has been very prudent... at a time when prudence is no virtue. In the last 12 months, the economy of the world's leading export nation, the envied producer of machinery and up-market durable goods, has shrunk by seven per cent.

Japan is in an even worse situation. Not only is its economy expected to shrink by a massive 6.2 per cent in 2009 but also the debt of its government now exceeds 200 per cent of GDP. This is worse than when its own financial bubble burst in the early 1990s. Globalisation glorified pro-trade policies; competitiveness became the hallmark of economic strength. Now export-dependent nations such as Germany and Japan have to pay a hefty price. How temporary all this is has still to be seen.

In the first quarter 2009, France (-1.2 per cent), Spain(-1.8 per cent) and Italy (-2.4 per cent) have contained the fall in their GDP. The real challenge for these tourism-oriented economies will come towards the end of this year. France claims that its centralised government system and its selection of infrastructure projects that could be launched without delay have enabled the country to be four months ahead in its recovery plan.

There is little good news for our economy whose GDP is expected to shrink by 0.9 per cent in 2009. A lot will depend on this summer's tourism, the government's ability to kick-start the economy and on progress in the SmartCity project. Time will not heal our economic problems. We are largely a real-estate economy and a major overseas marketing effort is needed to off-load the abundant properties that are on the market.

There is little room for complacency. Decisive action pays. We are not yet out of the woods.