Pre-war situation in the financial world
– talks of crisis and change
IBT Desk Report
Is the world economy heading for a crisis that may cause sufferings to many and bring long-term changes the way the World War II shaped the global order in the subsequent decades?
At least, the global media made a broad hint that the world economy is unlikely to be stable. Global community can see dark forces gathering but lacks the weapons or the will to tackle them effectively. And the global economy faces its biggest test of confidence since the European sovereign debt crisis as investors fear it’s running out of engines.
The euro zone, the world’s second-biggest economic area, seems to be falling from a feeble recovery back into outright recession as Germany hits the skids. Italy has been in recession for two years; France’s economy has been stagnant for months. Now that Germany is in trouble, the chances of a Japan-style deflationary spiral have risen sharply. Japan, the world’s third-biggest economy, may also be on the edge of a downturn. Russia’s and Brazil’s economies are stagnant, at best.
With Japan and the euro area throwing up fresh signs of weakness, emerging markets such as China are dragging instead of driving growth. The sense of tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of Ebola to Dallas.
The worry is that five years since the world limped out of recession, central banks have virtually exhausted their stimulus arsenals if activity keeps fading. That leaves the hopes of financial markets riding on the US to resume its historical role as a locomotive robust enough to pull up demand elsewhere.
The epicenter of the economic worries is the euro area, where European Central Bank President Mario Draghi is trying to tackle the weakest inflation in almost five years as investors bet it will deteriorate further amid signs from the powerhouse Germany is now faltering.
Unlike five years ago when they proved strong enough to lift the world out of its slump, emerging markets are now stumbling, too. Even in China, still growing at a suspiciously smooth 7.5% a year, there are worries about a property bust, a credit bubble and a fall in productivity. China’s annual growth is the slowest since 1990, while Brazil is trying to escape the recession it entered in the first half of the year.
The overall situation has been compared with the one prevailing in the pre-war period in the 1930s when diplomats attending the League of Nations meetings were desperate to avoid another war but were unsure how to do so. They can see dark forces gathering but lack the weapons or the will to tackle them effectively. The hope has been that copious amounts of dirt-cheap money will find its way into productive uses, with private investment leading to stronger and better balanced growth.
Now, the biggest reason for confidence that the storm will prove short lived are signs the US is again a potential oasis of prosperity. And Britain’s economy, where output was up 3.2% in the year to June, is growing faster than any other rich country’s. The world economy may not be on the brink of falling back into recession, but it is hardly on fire. The International Monetary Fund, for example, has lowered its growth expectations for this year and next in Europe, Japan and China, among others.
And even America and Britain should be wary, especially over tightening monetary policy too quickly. There is a lot that can go wrong—and they don’t want to be dragged back into those woods again.
The annual meeting of the International Monetary Fund voiced concerns. In fact, the IMF is alert to the threat of another financial crisis.
Christine Lagarde, the IMF’s managing director, says inequality must be tackled. The Fund has produced papers showing that a more even-distribution of income and wealth would be good for growth. The words ‘shared prosperity’ were on everybody’s lips in Washington DC.
But as some sceptics pointed out, so far the fight against inequality is currently a phoney war. Lagarde talks a good game, but the advice her organisation dispenses to individual countries has not really changed. The message may be: Lagarde et al are worried about inequality. But they are not yet worried enough to do much about it.
There were four things that ensured shared prosperity in the 1950s and 1960s: strong trade unions; redistribution through the tax system; higher public spending; and curbs on the financial system.
Does the present situation demand something new in the form of structural shift or initiative to correct the flaws within the financial system? Pundits are expected to come up with the answers or maybe, the partners of the currently globalised economy will pay some price to cope with the unforeseen situation.
