A flurry of recession warnings

(GETTY)   

 

 

 The outlook for the global economy this year is decidedly dour, but leading economists had mixed views about whether a recession could spread around the world.

 

Speaking at the World Economic Forum, economists from Asia and the United States and government ministers from India and China said the US economy remained on a downward course. However, they were divided on whether American ties with other countries could drag them down into a feared recession.

 

“If there is a tremendous slowdown in the US economy, then we must be worried about it,” said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. He said China is in a position to weather any slowdown because of its growth, and its position as a top emerging market that has expanded its trade with countries other than the US.

 

Stephen Roach, chairman of investment bank Morgan Stanley in Asia, pointed out that while the US is the largest economy, its links to world markets were indisputable, and that could have ramifications for other nations. “The rest of the world is not as resilient,” he said.

 

Asked by a Mexican businessman if his country would be spared if the US goes into recession, Roach was blunt. “My good friend from Mexico, you’re in trouble,” he said. “Mexican exports to the US account for 25 per cent of your GDP. Same number for Canada. How can the US go into recession and Mexico be fine?”

 

Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the US economy sneezes, the rest of the world catches a cold, but said this time the diagnosis in the US was worse. “In this case the US is going to have a protracted case of pneumonia,” he said.

 

The impact of the sluggish US economy, and what it may portend for other nations, hung over the event, even after the US Federal Reserve cut its benchmark refinancing rate to 3.5 per cent from 4.25 per cent in response to the latest in the global market meltdown.

 

“The US economy will correct itself,” said David O’Reilly, chairman and CEO of Chevron Corp. “I’m an optimist when it comes to the length of what may be a slowdown or a mild recession… the outlook is still pretty good.”

 

Economists also split along two lines over the role of central banks in bringing the world to the brink of recession, and whether institutions like the Fed were equipped to steer the global economy out of danger.

 

John Snow, former US Treasury secretary, said central banks have performed remarkably over the past two decades – better than any time in history, perhaps – and continue to make the necessary adjustments. “The issue of whether central banks are capable of vigorous action, bold action, was answered yesterday,” Snow said, referring to the Fed’s interest rate cuts. “They can’t see the world ahead perfectly, but who can?”

 

But Joseph Stiglitz, the 2001 Nobel Prize winner for economics and a critic of free market champions, and billionaire philanthropist George Soros disagreed.

 

“What we have now are the foreseeable consequences of bad economic management,” Stiglitz said.

 

Lawrence Summers, former Harvard University president and Treasury secretary under US president Bill Clinton, also said central banks have lost their way.

 

“I think it’s hard to give central banks a very high grade over the past couple of years on recognition of… bubbles and the ability to address them,” he said. “I think it’s hard to give a high grade over the past six months when the bubbles have been bursting and the banks have been behind the grade.”

 

Stephen Roach also forecast a recession. “When the US consumer is in trouble this has great consequences for the world economy.”

 

He said he was optimistic about growth in China and India, but the idea they could power the world economy on their own could “turn out to be a fantasy”. “World equity markets are starting to the price for a global recession scare. I think it’ll be a close call, but I don’t think we’ll move into global recession,” Roach added.

 

About the Fed, he said its actions were “reckless” and “dangerous” and he blamed the central bank for helping fuel the housing bubble at the source of the current US problems. “What worries me about the Fed, by easing aggressively on the basis of no new information other than the fact that equity market were in trouble, they are sending a message that they’re there once more to protect the markets.”

 

Trade Minister of India Kamal Nath was more positive about the economic outlook for Asia’s emerging economies, but he conceded that a recession in the US would greatly harm growth and development.

 

“This is the first time that the world is looking at the possibility of recession [in US] with two engines of growth, China and India. There can never be a decoupling from the US economy but the magnitude of the impact will not be what it was in the past,” he said.

 

A year ago, Davos attendees predicted that the economy would move ahead with confidence. But after the credit crisis brought on by massive exposure to sub-prime mortgage securities, the prevailing mood instead is one of caution.

 

That is not the case this year, said Nouriel Roubini. “It’s not about a soft landing or a hard landing,” he said, but “rather how hard a landing it will be”.

 

“We’re seeing a financial system that is under severe stress. The Fed cannot prevent this recession from occurring,” he said.

 

Klaus Schwab, founder and chairman of the Forum, said the meeting will focus on addressing economic insecurity, as well as helping businesses compete with each other by collaborating. The event will also look at how science and technology have expanded the frontiers of nature, and how the values of different societies can help people gauge emerging cultural trends.

 

The Forum will also touch on other issues affecting the world in 2008 and beyond, including stemming terrorism, pursuing a workable peace process in the Middle East and focusing on how technology is ushering in a new age of social networking that knows no borders.

 

In a nod to concern about climate change, Rajendra K Pachauri, chairman of the United Nation’s Intergovernmental Panel on Climate Change will also speak. (AP)

 
 
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