Pessimism Still Holding the Reins…Justifiably!

The Financial World According to Inya Column, by Inya Ivkovic, MA

At the G8 convention in Italy this week, if the world leaders agree on one thing, it will be that the Great Recession is going to last longer and it is going to hit us stronger than anyone could have known, potentially requiring more government cash infusions this year and the next. The consensus is that the global economy is still too weak to get in the next gear on its own and without massive economic stimuli in the future. But that is where the consensus also stops and opinions of world leaders diverge on many issues, such as which path to take forward, how severe the recession really is and how justified any future stimuli are, considering they’re also breaking the bank and busting budgets.

Among the pessimists, Russia and Britain lead the pack. Both countries believe that economic recovery is too far away and more stimulus spending will be needed. Russia went so far as to say that those seeing signs of stable and irreversible recovery should have their eye prescriptions checked, while Britain said that, as growth remains elusive, the Great Recession still has a debilitating punch or two, if not more, left in it.

As for the U.S., while President Obama didn’t close the door on more spending, he didn’t leave it wide open either. I suppose logging over a trillion dollars in the budget deficit column on account of economic stimulus makes it difficult to pile on more debt. And Canada chose the golden middle, urging patience and allowing for the economic stimuli already in global financial systems to work their magic before committing more money.

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Going back to what G8 agree upon: it is that the Great Recession is the worst economic downturn since WWII and, while there are some signs of stabilization, the timing of the recovery remains uncertain, as there are far too many macroeconomic factors that could have an adverse impact on it. This is something that the International Monetary Fund (IMF) also agrees on, stating that recovery, if and when it happens, is going to move at a snail’s pace. Nevertheless, IMF upped its global economic growth forecast for 2010 from 1.9% to 2.5%. Illustrating just how tricky the road ahead is, the IMF has also forecasted that the global economy in 2009 is going to contract more than recently stated, from 1.3% to 1.4%.

The tone of the G8 meeting was more subdued than when the G8 finance ministers met last month. Then, it looked that the economy just might pull a fast one and recover quickly. That optimism has been dispensed with this time around, particularly as world leaders debated how to unwind their stimulus spending to prevent hyperinflation.

Obviously, how much global stimulus is going to cost is alarming many investors and policy makers and that message has been delivered to, and by, G8 leaders. The IMF estimates that bailout and other counter-recession measures will leave the debt trail among developed economies at 114% their respective GDPs by 2014, which is about three times more than the level of spending vs. GDP among the largest emerging economies.

What makes these statistics frightening is that they seem like we’re choosing between the rock and a hard place. You’re darned if you don’t deliver the bailout money, darned if you do. But at least G8 leaders are talking about exit strategies, even if they simply cannot be implemented in the short term.