Is world out of woods?

SUBMITTED TO SUBMITTED BY
Prof. ASHOK BHANSALI RAHUL GUPTA
PGPBM (2009-11)
ISB&M; NOIDA



Two years after near-meltdown, with the US looking sluggish, equity markets groggy and Europeans
fighting a debt crisis, experts gathered in Italy offered a generally gloomy outlook especially for the
United States and much of the industrialized world.

Economist Nouriel Roubini, who warned in booming tones that "there is a significant risk of a
recession in the United States" as well as in Japan and many European countries.


Many of the growth drivers in place since the collapse of Lehman Brothers are winding up or have
ended, including not only the massive stimulus spending but tax breaks, schemes such as the "cash for
clunkers" program and for some countries like Russia high commodity prices.

The stimulus deemed necessary to jump-start moribund economies soon causes deficits and debt,
upsetting the markets enough to spur austerity which undermines growth.

Most of the world's growth stems from a developing world led by China which is so dependent on
exports that it needs the West to continue to buy, and so will suffer if recovery in the rich world
proves short-lived.

Europe continues to lose competitiveness partly because of the euro, which for all the fretting over its
dip earlier this year at the height of the Greek debt crisis remains high in purchasing price parity terms
versus the US dollar.

The sector that is widely seen as the spark of the global recession US real estate has not recovered,
with house-buying flat and the mortgage market, with its related financial instruments, essentially still
in ruins.

The job picture is not improving and in parts of the developed world such as Spain, with some 20
percent unemployment it is disastrous.

"Conditions in the US labour market are awful," said Roubini, who gained celebrity for predicting the
global collapse of 2008 when others were still celebrating the boom times. He added that even if some
U.S. growth is maintained in coming quarters it will be so low perhaps an annualized 1 percent, which
means per capita stagnation that "it will feel like recession for most people."

According to historian Niall Ferguson noted that since 2001 the United States has seen its debt-to-
GDP ratio double to 66 percent and that it may well be headed toward the danger zone of 100 percent.
"This is a completely unsustainable fiscal policy," said Ferguson. "Pretty soon the U.S. will be
spending more on debt service than national security. That's a tipping point for any global power."

But, Roubini warned that world growth leader China was too dependent on exports to the struggling,
West and predicted that within a year its economic growth will be overtaken by India, a huge nation
much more reliant on its domestic market for development.

"Greece will not make it," said Sinn. He encourage Greece to restore its drachma currency despite the
domestic banking collapse that could well result.

Sinn noted that bond spreads the difference between the cost of borrowing for troubled countries such
as Greece and solid ones such as Germany have swiftly returned to the startling levels that preceded
the Greek bailout in May.

But that development, while good for companies' bottom lines, is also a reflection of the stagnant
labor market and the shrinkage of payrolls as firms hope to produce as much as before with fewer and
more productive staff.


International Monetary Fund head Strauss-Kahn said the world economy was not "out of the woods"
despite a faster recovery in developing and emerging countries than earlier forecast.
He told reporters during a visit to the country that although global recovery was "resuming sooner
than expected, private demand was still not strong enough to signal the end of the prolonged recession
experienced by the world economy.
The IMF sharply raised its estimates predicting that the world economy would expand by 3.9 per cent
in 2010, much higher than the 3.1 per cent it projected last October, with the pace picking up to 4.3
per cent next year.
"The recovery is coming sooner than expected. But we are not out of the woods and we have to be
cautious," he added.
Predictions for recovery have been improving steadily since last year in tandem with an explosive
stock market recovery.
Strauss-Kahn, a former French finance minister, said that although a double dip could not be ruled
out, the IMF did not forecast one.
The former French finance minister also warned of the risks in a premature recovery that could
prompt governments to retreat from public stimulus policies too early and thus "shooting themselves
in the foot".
Along with concerns over sovereign debt in the euro zone, he added that a third risk was the "huge
amount of capital inflows that could go to countries such as Brazil and Indonesia that would create
bubbles"
Finance Minister Pranab Mukherjee today said the world economy was not out of the woods yet and
there was a need to calibrate the exit from fiscal stimulus.
We will, no doubt, need to rightly frame our exit policy considering our respective economic
situations and push for structural reforms to enhance the potential growth, he said addressing the first
session of G20 Finance Ministers and Central Bank Governors Meeting here.
Mukherjee said even though the risk of a global double dip recession might not be high, it was
important to acknowledge that the downside risks were elevated. He said that in dealing with high
sovereign debt in some economies, unemployment in advanced countries, volatility of capital flows,
inflationary pressures in emerging markets, and widening global imbalances, there was a danger of
getting the monetary fiscal policy mix wrong during the exit process.
Macroeconomic indicators say that global growth in the second quarter of this year has slowed down,
and there are headwinds to sustaining the global recovery. The recovery in advanced economies
remains fragile with high unemployment and sluggish household consumption.
Indian economy grew at 8.8 per cent during the first quarter of 2010-2011. The government is
projecting the economy to grow at 8.5 per cent this year. There are concerns arising from inflationary
pressures, and more importantly, from the uncertain external environment. However, with the strong
domestic demand, a stable financial system and growing investor confidence we expect to remain on a
high growth path.
As the process of recovery had been slow in countries in North America and also there were
uncertainties in Europe, the world leaders would have to consider ways and means to overcome the
present situation and find the path forward, he added.