— by Inya Ivkovic, MA
Major central bankers are saying that recovery is within reach, so what analysts have to do now is speculate how different the world and global economy are going to be when we are out of the woods finally. Voices around the globe are proclaiming nearly in unison that this recovery will be joyless. Why? As the global economy recovers, the growth will be painfully slow, carried only by half-hearted consumer spending and even more timid business investment.
The principal reason for this forecast is the fact that the world will no longer be able to rely on the U.S. consumer, the segment of the global economy contributing about 15% of growth annually (up until last year, that is). To put things into perspective, Americans used to spend every dime of their income, and often more than they earned, making up the difference by using (and abusing) easy-access credit and relying on house prices going up endlessly. But that runaway train crashed spectacularly last year when credit literally dried up and house prices plummeted, leaving the U.S. consumer extremely weak and strapped for cash in a severe jobless and liquidity-deprived environment.
Going forward, American consumers will have to start saving, something they haven’t done in decades, and they will have to pay their bills on time and from their paychecks (instead of perpetuating debt on their credit products). At the same time, they’ll have to get used to the fact that asset bubbles do not equal tangible wealth. All of this is referred to as deleveraging and is bound to take the wind out of this recovery in the medium to longer term.
But what about Asian consumers? Can they offset the loss of the U.S. consumers? With Americans effectively thrown out of the race, the global consumption growth has got to depend on someone! The natural choice for that “someone” would be consumers in the Asia-Pacific region; more specifically, consumers in China. However, that natural choice comes with baggage, such as the fact that saving, and not spending, is a deeply rooted social behavior of Asian cultures. To unlearn that behavior may take serious time, the kind of time that the global economic recovery doesn’t have and cannot afford.
Additional pressures placed on the global economy are the current government-sponsored stimulus programs. In the short term, these programs are of paramount importance and we are just starting to see the first results. It is expected that fiscal stimulus and the ultra-low-interest-rate environment will feed the economy with essential “nutrients” and jumpstart the output in 2010 and 2011. But what comes after that is frightening — deleveraging mountains of debt and making up for unprecedented budget deficits. To deleverage government debt successfully, economic stimulus, down to the last penny, will have to be cut from global financial and credit systems around the world, ideally starting in 2011, and by the end of 2012.
Is that even possible? I suppose anything is possible after surviving the unthinkable. But it will come at a steep price. Global fiscal consolidation will have to mean much less in government spending and eventually increasing taxes to boost governments’ revenues, all of which is bound to put more breaking power on the global economic recovery. Additionally, unless countries around the world are willing to do this painful job in unison, it might not even work and might lead to higher interest rates to curb the hyperinflation.
What else could slow down the recovery? Financial markets appear to be on the mend, but this new world is an extremely cautious one, as evidenced by tightened financial regulation, trade protectionism and a severely crippled labor market in most developed countries.
And what is left to help speed things along? The answer lies in more innovation leading to faster productivity growth. That is probably the only fundamental, coming from the inside, and truly reliable factor that could drive the global economy towards stronger recovery. Unfortunately, innovation requires a different mind-set. And that has always been one of the hardest commodities to come by.