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Are fears of global recession real?

R. Srinivasan

ECONOMISTS and business analysts around the world are coming to terms with the fact that the global economy has arguably entered a period of recession and uncertainty. The collapse of communism had ushered in a globalised economy in the 1990s triggering an expansion in world trade and a great volume of American investments into developing countries. The remarkable economic growth of the past decade was indeed, in part, due to the globalisation of trade that removed barriers between countries. From the end of 2000, there has been a marked stagnation in most economies, raising serous fears about the onset of a slowdown.

As the $10-trillion US economy has been the motive power of growth of other economies throughout the past decade, it is necessary to analyse the factors affecting it in order to assess those affecting the global economy. The Japanese economy the second largest is also a major factor influencing the world but continues to experience serious economic problems. The attack by terrorists on the World Trade Centre and the Pentagon has had ripple effect on the US economy as a whole.

The airline industry, which is big in the US with over 24,000 flights operating daily, has gone into hibernation due to poor patronage arising from a fear-psychosis and this, in turn, has affected the airline meal and catering industry and the hotel businesses. The airline industry was given a $15-billion bailout by the US Congress and there are indications that all other businesses affected by the terrorist attacks would also look to the government for aid packages. The stock market has been on a continuous decline, not only in the US but also in almost every country (the Table shows the extent of the fall over the past 52 weeks in major stock exchanges across the world).Though some indices are currently at a higher level than their yearly lows, still there is light. Even the steep cut in interest rates by the Federal Reserve has failed to stimulate the stock market as investors have generally preferred the safer, lower-yielding government securities to the high-risk equities.

As the US response to the terrorist attacks will, probably, be in the form of a prolonged war against an enemy it cannot easily locate, analysts are giving up hopes of the market recovering in 2002 as nobody knows what corporate earnings will look like next year. Other than the stock market indicators, the US economy also suffers from increasing unemployment, lower consumer spending, lower quarterly corporate earnings and lack of will in committing long-term investments in additional capacities and infrastructure. The airline industry alone is likely to lay off about 100,000 employees in the coming weeks. The US Government is reportedly considering several fiscal measures, such as a tax cut on capital gains to stimulate economic growth. The Federal Reserve has also been pumping money into the system in order to keep the cost of credit, and encouraging banks to keep lending.

Many American businesses have been adopting the just-in-time distribution practices over the past two decades or so as a means of cutting down on inventory. Following the stringent security measures imposed after the attacks, especially across the borders with Mexico and Canada, companies are no longer sure of on-time deliveries.. If the US looks like it is heading for a recession because of the above factors, Japan should be considered as being in a state of near-depression.

Policy-makers in Japan are looking at ways and means to weaken the yen, to bolster export earnings and revive growth. Japan is particularly vulnerable in this gloomy economic scenario, since it has already been staggering under the weight of a decade-long financial crisis. Economists aver that the recovery of the stock market to above-12,000 levels is crucial for Japans financial stability. But there are no signs of this happening until at least mid-2002, if not longer, and this means the Japanese economy will shrink throughout 2002, and there can be serious problems for the banking sector if the economy continues to be in the doldrums.

European governments hope their economies will not be affected by turmoils the global economy is now going through, but such hopes are increasingly receding with slowing demand, coupled with the recent stock market declines. As a result of the continued weaknesses in Japan and Europe, the growth of G-7 countries is expected to slide down to 0.8 per cent this year, down from 3.2 per cent last year. This would be the lowest growth rate for G-7 since 1992-93.

For most Asian economies such as Indonesia, Thailand, South Korea and Taiwan that depend on exports to the US, there is the grim prospect of a lack of demand in the US for much of the next year arising from reduced consumer confidence and, in turn, from reduced consumer spending. Ever since the East Asian financial crisis, these economies have had a continuous downturn in their fortunes with their currencies plummeting to abysmal lows.

The present slowdown in the US economy is likely to keep these economies subdued for at least the whole of 2002. Turkey, Argentina and Brazil have suffered from non-availability of private capital, driving them into the hands of multilateral agencies such as the International Monetary Fund and the World Bank, and have had to conform to the latters requirements for structural reforms, coupled with periods of enforced austerity.

Economies such as India, China and, to a lesser extent, Russia, are reasonably insulated from global turmoil, at least, for the time being, as their growth largely depends on catering for a huge domestic demand rather than on any significant exports. China, of course, now exports on a fairly large scale, much of the US requirements of items, ranging from consumer goods to hardware, production of all these being farmed out to China because of its cheap labour.

India is resilient, but inward looking still and will eventually get more exposed to the uncertainties of external environment as it gears itself to the threat of cheap imports.

So, is the global economy on the brink of a recession? There is no imminent danger of a collapse of the financial system worldwide, given the fundamental strength of the industrialised countries, coupled with the sizeable foreign reserves of the emerging Asian economies. According to the IMF, a global recession is recognised if the annual GDP growth rate of the world economy falls below 2.5 per cent. But this may not happen till 2002, in view of the Chinese economys expansion, even if its output is largely geared towards meeting its domestic demand.

But there could be a prolonged period of uncertainty if indeed the US-led coalition launches a war against terrorism. The only negative aspect arising from the US involvement in this campaign is that a significant portion of its will get sucked up in the campaign that could, probably, have been used for developing the third world.