Global economy remains fragile

The world economy has yet to recover from one of its worst crises and is still facing the specter of a fresh distress that could deal the strongest blow to the economic system, a prominent UAE think-tank said on Thursday.

The Abu Dhabi-based Emirates Centre for Strategic Studies and Research (ECSSR) cited statements by several global financial officials and data from the US and key industrial nations showing the global economy is limping slowly and is far from full recovery from the 2008 fiscal collapse.

The Centre, a government institution, also scoffed at what it described as claims by some economists that the press is to blame for the global crisis.

“It is ironic that many economists are now claiming that the printing press itself might have been the cause of the problem, for it aborted necessary early corrections in the economy, created asset bubbles in technology and real estate markets and created risks and debts at a faster clip than the printing press could cope with,” ECSSR said in a study published on its website.

“Thus, some economists claim that the US is now facing bankruptcy, thanks to its loose fiscal and monetary policies. In fact, in a recent article, Boston University Professor Lawrence Kotlikoff spoke the unspeakable: ‘Let’s get real. The US is bankrupt. Neither spending more nor taxing less will help the country pay its bills….. the sentiment was nearly echoed by Harvard University Professor Niall Fergusson: “Call it the fatal arithmetic of imperial decline ... Without radical fiscal reform it could apply to America next.”

The study added:”Thus, the fledgling global economic recovery still faces considerable headwinds and is not prepared for another 2008-like crisis. In the words of investment guru Jim Rogers: “When the next one comes (the crisis) the world is going to be in worse shape because the world has shot all its bullets.”

Referring to the August 10 meeting of the US Federal Open Market Committee (FOMC), ECSSR said the meeting validated concerns that the planned winding down of economic stimulus—at least in the US—would have to be stalled as the economic recovery had started floundering again.

It said this triggered a huge sell-off in financial markets of the US, Europe and Asia, adding that, the Dow Jones lost 3.3 per cent for the week.

It cited a statement by the US FED, which conceded that the pace of US economic recovery had slowed in recent months and that it had to decided to roll over its maturing mortgage bonds into long-term Treasury purchases.

Thus, it would spend $10 billion a month buying US Treasury bonds, instead of reducing the burden on its balance sheets as it aimed to maintain the current level of stimulus in the US economy, according to the study.

“The bad news about the US economy was followed by disturbing news from Asia, where stocks declined on reports of weak growth in Japan in the second quarter, registering a paltry 0.1 per cent. In fact, this Japanese slowdown officially catapulted China to the position of the second largest economy in the world. Still, official figures released from China on August 11 showed factory output and lending were lower in that country in July,” it said.

“Moreover, a Chinese think tank (the State Information Center under National Development and Reform Commission) forecast that China’s GDP is likely to fall to 9.2 per cent in the third quarter and to 8-8.5 per cent in the fourth quarter of this year. Meanwhile in India, the central bank (Reserve Bank of India) continued raising interest rates to reduce double-digit inflation in the country as the economy struggled with fears of overheating.”

Turning to Europe, ECSSR cited government data showing GDP growth figures from Germany were highly encouraging, but that troubled “ClubMed” countries (Spain, Portugal and Greece) reported slowdowns in their economies.

In addition, production levels fell across Europe in June, as factory output dropped by 0.1 per cent, dashing general expectations of an increase following the decline in the value of euro, according to the study.

It noted that French industrial output also floundered in the second quarter, rising by a mere 0.8 per cent. In fact, it added, French auto industry production declined by 7.4 per cent in June after the government ended its “cash for clunkers” programme.

”But the more unsettling news kept streaming in from the world’s biggest economy. Unemployment claims in the US rose to their highest level in nearly six months, rising by 2,000 to about 484,000, according to a report released by the Labor Department. It is the first time in US history that over 50 per cent of the unemployed have been out of work for over six months,” it said.

“Improvement in employment figures is considered critical for economic recovery, for it increases consumer spending and subsequently industrial production.Meanwhile, US trade deficit unexpectedly widened in June with exports recording the biggest slump in over a year.”

It quoted US Department of Commerce futures as showing the trade deficit rose to $49.9 billion in June, an 18.8 per cent increase from May. 

The figures were even more unsettling as economists had expected a decline in the trade gap due to low petroleum prices, it said.

“But the most depressing news came from the US real estate sector, the epicenter of the global economic crisis. The National Association of Home Builders Housing Market Index recorded a new low in confidence among home builders, which unexpectedly fell to 13 in August—a 17 month low—just after the end of the Federal Home Buyers Tax Credit program this spring.”

The report also quoted Nobel laureate in Economics Joseph Stiglitz as saying recently that the US residential real estate might see a bigger downturn this year.

Even as almost the entire US housing market is presently supported by the government, it is feared that the struggling commercial real estate would add to its burden, as half of it is now feared to be underwater, it said.

“Such unnerving statistics has increased pessimism among economists about the state of the global economy. Thus, Nobel laureate in Economics, Paul Krugman avers: ‘We are now, I fear, in the early stages of a third depression.”

In addition to this pessimism, there is also a lot of confusion and debate among economists and governments around the world over the nature of the crisis and the policy measures needed to rescue the global economy, ECSSR said.

“As European states are concentrating more on introducing austerity measures in order to reduce their rising sovereign debts, even if it entails at least a short-term deceleration in growth, the US seems to be continuing with its fiscal stimulus and monetary easing measures in a bid to grow out of the economic downturn. Perhaps, the US understands that for the moment it enjoys more leeway than its European counterparts but its ability to increase government spending to counter private sector deflation is falling fast,” the study said.

“After almost two years of the crisis, which was followed by the most extravagant bailout in the history of the planet, fears that an anemic global recovery cannot sustain itself without government support were revived in early August.”

Follow Emirates 24|7 on Google News.