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Recession abates but crisis not over yet: experts

Recession abates but crisis not over yet: experts
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First Published: Thu, Aug 06 2009. 11 17 AM IST
Updated: Thu, Aug 06 2009. 11 17 AM IST
Paris: The global economy is showing timid signs of recovery but experts warn the crisis is by no means over and that rising unemployment and a shaky banking sector remain major worries.
Encouraged by a series of upbeat economic results, President Barack Obama last week said that the US could be seeing the beginning of the end of the recession, while the Chinese economy has continued to post strong growth.
Financial markets have been boosted from record lows earlier this year.
“There are signs of a deceleration of the recession,” a former senior official at the International Monetary Fund (IMF) said on condition of anonymity.
The risk of a new systemic shock like the collapse of US investment bank Lehman Brothers last year now appears to be a distant prospect.
“States will use any means to avoid the collapse of a financial establishment,” said Cinzia Alcidi, an economist at the Centre for European Policy Studies in Brussels.
Elie Cohen, an economist at France’s National Centre for Scientific Research, said: “We have managed to avoid the collapse of the house of cards of global finance.”
But the economic situation is still uncertain and the end of the recession will not automatically mean a return to sustained economic growth.
“The world economy is going to stagnate at a low level for a long time,” said Francois Bourguignon, former vice-president of the World Bank.
Cohen agreed, saying: “The crisis has been subdued but its effects are still very serious.”
One major test ahead will be the sharp rise in global unemployment.
The International Labour Organization (ILO) says that the number of unemployed people worldwide could rise by 59 million people this year compared with 2007 — a rise of 31% — and experts warn that this tendency could continue.
“In an economy that stops contracting but grows weakly, unemployment will continue rising,” Bourguignon said.
That means household incomes will continue to suffer and consumption — one of the major engines of economic growth — could be hit as a result.
The capacity of banks to recover is another source of worry, particularly in Europe where companies depend on the banking system to finance investments.
“There is a risk of a massive loss of growth in Europe if we do not lift the shroud of secrecy on the banks,” said Nicolas Veron, from the Bruegel Research Centre in Brussels.
The US has already carried out stress tests on its biggest banks but EU authorities have been reluctant to do so despite mounting pressure.
Alcidi said: “In order for private investment to take up the initiative from the state there absolutely needs to be clarification.”
Many experts are also alarmed about the rapid degradation of public finances in some of the most advanced economies in the world even though they recognise that some expensive stimulus plans have been useful.
The IMF warns public debt in advanced economies could reach 120% of their combined gross domestic product in 2014, complicating the situation when they try to raise money on the financial markets.
International credit ratings agency Moody’s has said that the deterioration in public finances is now a central aspect of the crisis.
“And if there are any new shocks to the global economy, governments face an unenviable choice,” Cohen said.
Cohen said: “Countries will have to choose between new stimulus measures that would ruin their finances or fiscal orthodoxy that would worsen the situation.”
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First Published: Thu, Aug 06 2009. 11 17 AM IST