Delicately poised

Economic data from across the globe strongly suggest that the world economy has been slowing down recently. Factory output has declined perceptibly. In the advanced economies, the financial markets have been sliding and there is a distinct loss of confidence among investors. Consumer spending in the developed world has not picked up to the extent expected. Crude oil prices have been rising on supply uncertainties and the trend is likely to continue. High petroleum prices result in a transfer of wealth from cash-strapped consumers to producers who generally sit on their windfall earnings and do not contribute to global economic recovery. The twin natural disasters in Japan not only caused its GDP to fall sharply but seriously disrupted supply chains across the world, halting assembly lines in many countries. In the emerging economies such as India, inflation has been high and, as the authorities hike interest rates, the growth in output has slowed from its heady pace. On the other hand, recovery in the advanced economies has been anaemic, ominously so at a time when there is a serious talk of their governments withdrawing the stimulus packages. Taken together, global economic growth is seen to be at its weakest since recovery began two years ago.

Yet while these are genuine concerns, there are good reasons to be optimistic. Previous fears of a “double dip” recession in the developed world did not materialise, and this time too, despite some hiccups, the world economy should recover in the latter part of the year. As the IMF’s latest World Economic Outlook points out, the global economy has continued to grow at 4.3 per cent, the rate indicated in its earlier forecast for 2011-12. Although downside risks have increased significantly — notably from the greater than anticipated weakness in the U.S. economy and the European debt crisis — they have been compensated substantially by certain “off-setting” factors. If Japan’s twin natural disasters were an unpleasant surprise, the strong performance of France and Germany has been hugely positive. As Japan’s reconstruction gets under way, the rebound of its economy is forecast to offset any weaker growth in the U.S. Much will depend upon how the European debt crisis is resolved. The way the developed countries confront their major fiscal challenges will determine the course of recovery. Sadly, one of the fundamental tasks — repairing the financial sector — has so far not been fully addressed.

The Hindu

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