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Is the world
heading towards global stagflation?
Masahudu Ankiilu Kunateh, Ghanadot
Accra, April 23, Ghanadot - The world economy is likely to shrink this year for the
first time in six decades.
The International Monetary Fund (IMF) projected the 1.3
percent drop in a dour forecast released Wednesday. That
could leave at least 10 million more people around the world
jobless, some private economists disclosed.
"By any measure, this downturn represents by far the deepest
global recession since the Great Depression," the IMF said
in its latest World Economic Outlook. "All corners of the
globe are being affected."
The new forecast of a decline in global economic activity
for 2009 is much weaker than the 0.5 percent growth the IMF
had estimated in January.
Big factors in the gloomier outlook: It's expected to take
longer than previously thought to stabilize world financial
markets and get credit flowing freely again to consumers and
businesses. Doing so will be necessary to lift the U.S., and
the global economy, out of recession.
The report comes in advance of Friday's meetings between the
United States and other major economic powers, and weekend
sessions of the IMF and World Bank. The talks will seek to
flesh out the commitments made at a G-20 leaders’ summit in
London last month, when President Barack Obama and the
others pledged to boost financial support for the IMF and
other international lending institutions by $1.1 trillion.
The IMF's outlook for the U.S. is bleaker than for the world
as a whole: It predicts the U.S. economy will shrink 2.8
percent this year. That would mark the biggest such decline
since 1946.Among the major industrialized nations studied;
Japan is expected to suffer the sharpest contraction this
year: 6.2 percent. Russia's economy would shrink 6 percent,
Germany 5.6 percent and Britain 4.1 percent. Mexico's
economic activity would contract 3.7 percent and Canada's
2.5 percent.
Global powerhouse China, meanwhile, is expected to see its
growth slow to 6.5 percent this year. India's growth is
likely to slow to 4.5 percent.
All told, the lost output could be as high as $4 trillion
this year alone, U.S. Treasury Secretary Timothy Geithner
estimated.
Besides trillions in lost business, a sinking world economy
means fewer trade opportunities and higher unemployment. It
raises the odds more people will fall into poverty, go
hungry or lose their homes. And while, keeping a lid on
interest rates and consumer prices the global recession
increases the risk of deflation, which would drag down
prices and wages, making it harder for people to make
payments on their debt.
The jobless rate in the United States is expected to average
8.9 percent this year and climb to 10.1 percent next year,
the IMF said.
In Germany, the jobless rate is expected to average 9
percent this year and 10.8 percent next year. Britain's
unemployment rate is projected to rise to 7.4 percent this
year and to 9.2 percent next year.
Brian Bethune, an economist at IHS Global Insight, estimates
that at least 10 million jobs could be lost this year,
mostly in the United States and Europe, because of sinking
global economic activity.
He and other economists said the 1.3 percent projected
declines would be the first in roughly 60 years. In a report
issued in mid-March, the IMF predicted global activity would
contract this year "for the first time in 60 years," though
it didn't offer a precise estimate then.
Next year, the IMF predicts the world economy will grow
again — but just 1.9 percent. It said this would be
consistent with its findings that economic recoveries after
financial crises "are significantly slower" than ordinary
recoveries typically are.
All those factors tend to weigh against prospects "for a
speedy turnaround," the IMF said.
In 2010, the IMF predicts the U.S. economy will be flat,
neither shrinking nor growing. Germany's and Britain's
economies, meanwhile, will shrink less — by 1 percent and
0.4 percent respectively, it estimates.
Others countries, such as Japan, Russia, Canada and Mexico
are projected to grow again. And China and India should pick
up speed.
The financial crisis erupted in the United States in August
2007 and spread around the globe. The crisis entered a
tumultuous new phase last fall, shaking confidence in global
financial institutions and markets. Total worldwide losses
from the financial crisis from 2007 to 2010 could reach
nearly $4.1 trillion, the IMF estimated in a separate report
Tuesday.
The crisis has led to bank failures, wiped out Lehman
Brothers and forced other big institutions, like insurance
giant American International Group, to be bailed out by U.S.
taxpayers.
And it's triggered radical government interventions — such
as the United States' $700 billion financial bailout program
and the Federal Reserve's $1.2 trillion effort to lower
interest rates and spur spending.
Actions by the United States and government in other
countries have helped ease the crisis in some ways. But
markets are still not operating normally.
The 185-nation IMF, headquartered in Washington, is the
globe's economic rescue squad, providing emergency loans to
countries facing financial troubles. It has urged countries
to take bolder actions to bolster banks.
The IMF also has pushed countries to work more closely
together. It favors coordinating fiscal stimulus efforts
through tax reductions or greater government spending to
stimulate the appetites of consumers and businesses. And it
warned countries to resist the temptation of enacting
protectionist trade measures.
"Fiscal policies had made a gigantic difference," said IMF
Chief Economist Olivier Blanchard. Without them, the hit to
the global economy would have been much greater and pushed
it perilously close to "a depression," he added.
Because the world economy won't be back to normal next year
or perhaps even in 2011, Blanchard urged countries to spend
money on big public works projects — something the Obama
administration is doing — to bolster activity.
Bold policy actions could set off a mutually reinforcing
"relief rally" in financial markets and a revival in
consumer and business confidence, the IMF said in its
report. But it remains concerned that these policies won't
be enough to break the vicious cycle whereby deteriorating
financial institutions feed, in turn, weaker economic
conditions.
"The problem is that the longer the downturn continues to
deepen, the slimmer the chances that such a strong rebound
will occur, as pessimism about the outlook becomes
entrenched and balance sheets are damaged further," the IMF
said in the report Wednesday.
With the global economy stuck in a recession, the risks of a
dangerous bout of deflation — a prolonged decline in prices
that can worsen the economy — has risen. The IMF cited a
"moderate" risk of deflation in the United States and in the
16 countries that use the euro. It saw a "significant
likelihood of deeper price deflation" in Japan.
This combination of stagnant or falling output and rising
prices is why more and more economists and analysts in the
US have started using the dreaded S-word, stagflation, to
forecast the immediate future of the US economy as well as
the world economy.
This immediately brings to mind analogies with the period of
the 1970s, when not only the US but the entire world economy
suffered a prolonged period of income stagnation and even
decline and increased unemployment, accompanied by
escalating price levels.
At that time, the rise in oil and other commodity prices
combined with attempts by workers in developed countries to
maintain their real wages in the face of rising costs of
living generated inflationary spirals, and economic
volatility and depressed investor expectations triggered by
real output and employment to stagnate.
The stagflation hypothesis appears to be reinforced because
the current period is also a time when global commodity
markets are experiencing some of the highest prices ever,
while crude oil prices are uncertain.
So does all this suggest that not only the US but the entire
world economy is heading towards global stagflation? The
answer may well be yes.
Ghanadot
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