Friday, June 03, 2011
Rough times for global economy: The middle of the road situation
The economic recovery arising from the financial crisis of 2008, seems to follow the traditional path. Let make clear that it is not the same an economic recovery back from a real shock ,(sharp drop in exports), that a recovery back from a financial shock. While in the former, it is a matter decrease domestic spending to stabilize aggregate demand, in the later, it is a matter of the real conditions of the financial sector to support growth, which mean its ability to overcome credit crunch, when firms need additional resources for its cash flow.
A weak financial sector, make the whole process a lot more complex. Actually, financial sector in developed countries is still in the process of getting back to normal , which according to prestigious research center, it might need up to three years to reach the fully recovered status (www.seriworld.org).-
Besides, at this moment the main concern is how to cope with debt and the risk of inflation. The former imply the risk of higher taxes or spending cuts, none of which help to boost expectations for further gains in economic growth. The later, induces a tighter monetary policy which does not help the recovery either.
Thus, given a confuse framework arising from the combination of both, the effect of the solutions applied since 2008 , and the still ongoing structural weakness of the economy, private investment delay decisions concerning job creation, weakening household expectations about improving income level . Moreover, both overcapacity and weak demand will keep housing market fragile for a longer than desired period of time.-
Worst of all, the willingness for international cooperation, which was a key factor to overcome the initial stage of the crisis, has been replaced by domestic needs in each of the big global player. Whether it is the currency volatility ,the debt level, the rescue package for those in trouble , or the implications of fiscal deficit increase, it all add up to more global uncertainty.-
It follows that the financial crisis effects on the global economy are far from over. On the other side, Emerging economies on their own can not overcome current uncertainty, or compensate oil prices increases.
Therefore, because of uncertainty , it is time to focus on expectations making clear that key macroeconomic variables (inflation , debt and fiscal deficit) are under control. Besides, it does not seem to be the time for further government involvement, aside from what it has done. Perhaps to get a more robust global recovery, it is the time to make easier to the private sector, to be in charge of the remaining second half of the road.-