Prospects for global growth worsening
Prospects for global growth have deteriorated over the past year with most developed economies in a recession and developing economies suffering setbacks.
Early this month, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the US panel recognized as the official arbiter of business cycles, announced it has determined that the recession in the United States began in December 2007.
The classic definition of a recession is two consecutive quarters of negative gross domestic product (GDP). The NBER, however, did not identify economic activity solely with real GDP growth but used a range of indicators, such as employment, personal income and industrial output, in determining the onset of recession.
"The questions that remain are just how bad and for how long this recession will linger over us," said Michael Fowlks, analyst at Investor's Observer.
Some fear that the current recession might be the longest at least since the 1981-82 recession, which lasted for 16 months.
As recession fears have become a reality in the United States, other economies from Europe to Asia have fallen victim to the financial crisis.
In the third quarter, Swedish economy contracted a 0.1-percent growth for two consecutive quarters, meaning that it has stepped into recession together with other EU members like Ireland, Italy and Germany.
Japan slipped deeper into recession with factory output tumbling 3.1 percent and consumer spending dropping 3.8 percent in October.
In India, a rising economic powerhouse, the economic growth slowed by 0.3 percent in the third quarter from 7.9 percent in the second.
On November 6, the International Monetary Fund(IMF) revised its world economic growth projections downward, saying "global activity is slowing quickly".
According to the IMF, the world economy will grow just over 2 percent in 2009, down by 0.75 percent from its projections made in October.
The downturn will be led by developed economies, which as a whole will contract 0.3 percent on a full-year basis next year, the first such fall since World War II. The US economy is projected to drop 0.7 percent in 2009.
Developing countries, being at the mercy of a crisis not of their making, will see much slower economic growth next year.
The IMF expects the world economy to recover in late 2009.
Further fiscal stimulus may check decline of global growth
Acknowledging the economic outlook is "exceptionally uncertain", the IMF said a stronger macroeconomic policy response could limit the decline in world growth, noting its projections are based on current policies.
"There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors," it said.
However, monetary policy may not be enough because monetary easing may be less effective in the face of the difficult financial conditions and deleveraging – cutting back on the amount borrowed as compared to equity.
Also, in some cases room for further easing is limited as policy rates are already close to the zero bound. In the United States, for instance, a key interest rate has been cut to 1 percent, down by 4.25 percentage points since September 2007.
"These are conditions where broad-based fiscal stimulus is likely to be warranted," said the IMF.
"Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space," it noted.
The IMF's call for further fiscal stimulus has received an echo in the Group of 20 (G-20), which comprises major developed and developing economies.
At a summit in Washington on November 15, the G-20 leaders vowed to work together to revive their economies, calling for fiscal stimulus measures to take "rapid effect" and more rate cuts.
The G-20 support could bolster efforts in the United States to push through a second economic stimulus plan.
On November 22, US President-elect Barack Obama announced a two-year plan to simulate the economy which is facing "a crisis of historic proportions". He aims to create 2.5 million new jobs by January 2011 and lay the foundation for the country's economic recovery.
The first plan – a 168-billion-dollar package, which includes rebates for people and tax breaks for businesses, was speedily passed by US Congress and signed into law by President George W. Bush in February this year.
IMF Managing Director Dominique Strauss-Kahn has welcomed the emphasis on fiscal stimulus by the G-20, "which I believe is now essential to restore global growth."
"Each country's fiscal stimulus can be twice as effective in raising domestic output growth if its major trading partners also have a stimulus package," he said.
(Xinhua News Agency December 12, 2008)
