Issue 73 - 28th June, 2012


Chetan Sharma, Editor-in-Chief, Connect takes a hard look at what is ailing the global economic scenario and presents an incisive point of view and measures to contain the rot.

Give us a break – is what we stressed global citizens asked of our policy makers. They obliged and “gave us a brake”. Recess is different from recession. It means a break and is usually short. Recession breaks you and is rarely short.
Question then. Is the world in recession? Pretty much so. Even though there is no official confirmation, the writing is on the wall. What’s worse is that the wall is made of crumbling BRICS.
Recession is not a signpost which tells you of having arrived. It is more like a direction board, which tells you where you are headed and how far you are from there. Ideally, you never get there and hope to reverse. In fact the ‘there’ is an abyss. The signpost deals with signals, which are already evident. And it’s all stems from the alphabetical order ABCDE - All Indices, Business, China, Deficit, and Euro zone.
All indices today indicate a commodity crash. This is a classic lead indicator of a global recession. Brent crude oil has fallen by a third to $90 per barrel in this year. Major global commodity indices, be it metal or agriculture have slumped over 20%. Global Steel majors are shutting plants because of falling demand. Commodity exporters like Brazil and Russia who rode on the boom now prepare for the gloom. India, a net commodity importer, should gain from falling prices. Yet its GDP growth has plummeted too.
Business is bad. Global GDP has moved from blip to slip to double dip. What’s worse is the growing consensus of its longevity. Euro zone remains a trouble zone. No reason to think it won’t remain so. The German hope which stabilized growth in the January-March quarter could not hold. April- June reveals a sharp fall. German factories are suffering the sharpest fall since 2009; neighbor UK remains in depression and the US situation remains depressing.
China was looked at to check the global slowdown. It was the most popular version of the term ‘Chinese Checkers’ – Optimists thought the ills of rich countries will be compensated by the grills of fast-growing emerging markets — above all China. Alas, China is slowing down too. The HSBC Purchasing Managers’ Index shows that Chinese manufacturing has actually fallen in May and June. This has hit Japan, which depends on exports to China. Japan is now running trade deficits month after the month, for the first time in decades. Even India, which was thought to be immune from global troubles, now finds its internal political turmoil play out in the dwindling economic numbers. It’s bad for India, but its worse for the world which now has precious little to look forward to.
Deficits – This is reaching alarming proportions both in India and China. For the Euro zone, the Maastricht Treaty forbade anything over 3%. Forget the Euro zone, hardly any country outside it matches up. Last year, fiscal deficits as a proportion of GDP were 13% in Ireland, 9% in Greece, 8.5% in Spain, and 4% in Portugal and Italy. Even France and Holland, supposedly non-crisis countries, had fiscal deficits of 5%. The problem lay not just in excessive austerity but more so in the structural suicide of creating the Euro zone, a monetary union without a political union.
Euro zone - This fundamental blunder remains intact with no prospect of early resolution. A Euro zone break-up would cause massive chaos and misery for a year or two, after which economies would pick up. Trying to save the Euro zone will mitigate immediate misery, but ensure that it continues for years till it becomes politically intolerable. Europeans refuse to confront the dilemma squarely. Instead, they are devising quick fixes for the immediate problems of Euro zone banks and governments. Germany may approve some growth measures and relax objections to direct ECB lifelines to stricken banks and debt-ridden governments. This can put off the day of reckoning, but cannot cure the underlying disease of an ill-conceived monetary union.
Solution - Ask anyone - what’s the worst three letter word – which you pay but never know why and to whom you pay? It’s TAX. Ask anyone, what’s the best three letter word in a recession? It’s CUTs. Cut interest rates, costs and extras.
Cutting Interest rates: is a standard remedy for recessions. Governments cut interest rates, provide easy money, and run large fiscal deficits to revive demand. Alas, these strategies have very limited scope today because the world is already replete with loose monetary and fiscal policies thanks to attempts to regain momentum after the 2008-09 recession. Interest rates are at or below 1% in Europe, Japan and the US. The US Federal Reserve and European Central Bank (ECB) have injected trillions of dollars and Euros respectively into their regions, breaking all records in easy money.
Cutting extras or bringing in austerity was sought to be solution for defaulting countries. However recent elections have brought to power parties in France and Greece saying there is too much austerity, so the region must aim for growth too. The IMF and several economists across the world echo this sentiment. This is a dangerous ploy. The ECB Bank has injected trillions of Euros into the region, including ultra-cheap money to banks, massive contributions to rescue funds, and large-scale purchases of government bonds.
At the beginning of this millennium we all started out as globetrotters with money in our pockets and the world at our feet. Now we have become globe rotters with just pocket money and the world unable to find its feet.
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