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JOBLESS NOW THE SLEEPING DRAGON?
Florence Chong*
17-05-2010
April/May 2010 ATI Magazine
HAVING steered itself out of the Great Recession of 2009, the global economy is looking tentatively to sustainable recovery beyond this year. This is a vast improvement in global outlook compared to a year ago.
The two key problems facing the world today are high unemployment and rising sovereign debt. In its latest World Economic Outlook, the International Monetary Fund (IMF) says unemployment will remain high – at about 8.4 per cent this year, declining to 8.0 per cent in 2011. It says the US, European Union and Japan must do more to create jobs.
Unemployment is stubbornly high because the recession was triggered by financial crisis and a major housing bust, it says. “Therefore, one legacy of the Great Recession will likely be persistently high unemployment rates in several advanced economies. Because high unemployment can quickly become a structural problem, this could lead to serious political and social challenges,” the IMF warns.
William Rhodes, the Institute of International Finance’s (IFF) First Vice Chairman and Senior Vice Chairman of Citigroup, says high unemployment is feeding pressures for trade and financial protectionism. This is something which, so far, is not a serious problem, says WTO Director-General, Pascal Lamy. But the WTO
is not letting its guard down. It still believes protectionism is potentially an issue.
Trading relationships, especially between the United States and China, have become fractious – and from time-to-time threaten to escalate into a full-fledged trade war. US politicians are under pressure to act to protect US jobs and impose restrictive measures on Chinese imports, with the US unemployment rate remaining at 9.7 per cent in spite of some 162,.000 new jobs having being created in March.
The prospects of unemployment will
dampen demand for both goods and services in advanced economies. Rhodes says a great deal is at stake — globally.
In its policy letter to leading Ministers of Finance and Central Bank Governors meeting in Washington for the Spring meeting of the IMF in late April, the IIF reiterated its deep concern at the likely reversal of globalisation in the financial services sector.
Capital flows to emerging markets have become increasingly important in the global financial system. According to the IIF, the Washington-based organisation representing 340 commercial banks, net private capital flows to emerging markets this year are projected to rise to US$709 billion – up from US$531 billion last year — and to US$746.4 billion in 2011.
But the free movement of capital could be restricted if nations do not agree on a coherent set of reforms for the financial sector.
In the wake of the crisis, the Bank of International Settlements (BIS) began work on a package of proposals to strengthen global capital and liquidity regulations under its Basel Committee on Banking Supervision, tasked with the responsibility of finding a response to address the lessons of the crisis. The proposals were approved by central bankers in December last year, and are awaiting implementation.
IIF Executive Director, Charles Dallara, says it is essential that there is an assessment of how proposed reforms will impact on economic recovery and employment.
“In coming weeks, we will have a lot more to say on this subject as we complete an initial assessment of our own. Our initial findings are sobering. They suggest that, even in a scenario reflecting only the main Basel Committee proposals and no other national initiatives, there will be a significant adverse impact on unemployment and on growth in the US, extending over several years,” says Dallara. There will also be a more substantial effect on the Euro-area — and material
effects on Japan and on the emerging market economies.
The availability of capital is already being constrained, with competition from governments seeking to fill their growing budget deficits. Countries around the world initiated an unprecedented level of stimulus relative to their GDP during the crisis. Even in countries such as Australia, which escaped the global economic crunch, concerns are mounting over the high level of debt.
International financial institutions urge countries to start working on strategies to gradually pull back stimulus. Rhodes says delays in formulating strategies to address the very large fiscal deficits can undermine confidence, generate market uncertainties and endanger growth prospects.
Strong economic growth will be necessary for countries to peel back their deficits. But this is a tough call in an environment of low job growth and uncertainties.
Questions hang over the sustainability of global growth. However, the IMF has upgraded its January forecast by 0.3 per cent to projected global growth of 4.1 per cent this year, rising slightly to 4.3 per cent in 2011. Both the IMF and the World Bank have upgraded their growth projections for Asia Pacific. The IMF says developing Asia will lead global growth again with forecasts of 8.7 per cent in 2010 and 8.6 per cent in 2011.
By 2011, the combined total nominal GDP of emerging economies will amount to 57 per cent of the combined GDP of the US, Europe and Japan – up 17 per cent from 40 per cent in 2006, according to estimates from the IIF.
This shift itself is creating its own tensions among nations, faced with having to adjust to new realities. It will not be helped by continuing uncertainties clouding the recovery.
* Florence Chong is Editor of ATI Magazine. |
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