02.10.2009 13:07

World economy gropes on road to recovery amid mixed signs

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02.10.2009 13:07

As the International Monetary Fund(IMF) and the World Bank annual meetings approach as another arena for policy makers to discuss ways to resume and sustain growth, the world economy is scrabbling on the way out of the deepest recession since the 1930s.

Signs of stabilization are mixed with warnings for further risks. On the good side of the picture, the global economic output is forecast to increase 3.1 percent year-on-year in 2010, an upward revision of 0.6 percent from its April prediction, said an IMF report released Thursday.

A day earlier, the IMF said in another report the global financial stability "has improved" following unprecedented policy actions and signs of economic recovery, lowering its estimate of losses from the global financial and economic crisis by around 600billion U.S. dollars to 3.4 trillion U.S. dollars.

Triggered by a subprime mortgage meltdown that erupted in the United States in the summer of 2007, the global financial crisis and the ensuing recession have devastated banking systems, erased jobs and stagnated global trade.

As an evidence for healing wounds, the U.S. government estimated Wednesday its economy shrank at an annual rate of 0.7 percent in the second quarter, 0.3 percentage point better than previous estimates. In the first quarter, the world's biggest economy saw its real gross domestic product (GDP) decrease 6.4 percent.

All the fresh signs echoed with previous indicators in the world's major powerhouses and built hopes for a sooner-than-expected recovery, after governments poured trillions of dollars into bank rescue and fiscal stimulus.

In the European Union (EU), seasonally adjusted GDP dipped 4.8 percent in the second quarter compared with the same period last year, but fell only 0.2 percent at a quarter-on-quarter level, according to first estimates released by Eurostat, the Statistical Office of the European Communities.

In the first quarter of this year, the quarter-on-quarter growth rate stood at minus 2.4 percent.

France and Germany have already emerged from recession in the second quarter, recording a 0.3 percent expansion from the previous quarter.

Following France and Germany, Japan's economy grew 0.6 percent in the second quarter from the previous quarter, becoming the third Group of the seventh country to return to growth as exports and domestic consumption strengthened.

Emerging economies are expected to lead the recovery, with Thursday's IMF report forecasting a 9 percent growth for China and6.4 percent for India in 2010.

However, the bouncing back so far has mainly been driven by huge public spending and inventory adjustment by firms, which cannot last forever, said Olivier Blanchard, the IMF's Economic Counsellor and Director of Research Department, at a press conference here Thursday.

Mounting fiscal deficits, insufficient bank credit to support private investment and weak private demand due to high jobless rate will pose challenges to the future process of economic mending, he said.

Unemployment in the 16-country euro zone rose to a 10-year high of 9.6 percent in August on a seasonally adjusted base, compared with 9.5 percent in July and much higher than 7.6 percent in August 2008, the Eurostat said Thursday.

In the United States, consumer confidence index fell unexpectedly in September to 53.1, compared with 54.5 in August, as the country's unemployment rate stood at 9.7 percent in September, its highest level in 26 years.

In Japan, seasonally adjusted exports slipped 1.3 percent in July from June, indicating a receding effect of strong government stimulus in the world's major economies.

Debt levels are projected to reach 110 percent of GDP by 2014 in advanced countries, where fiscal authorities also face additional pressure from an aging population and increasing healthcare costs, said Blanchard.

Meanwhile, banks purified from poisonous assets still have a long way to go in rebuilding capital, strengthening earnings, and weaning themselves off government funding support, the IMF said in Wednesday's report.

Another risk came from trade protectionism, which has been on the rise since the financial crisis translated into a recession. Economists have blamed a spiral of trade wars during the crisis in the 1930s for helping push the world economy into the Great Depression.

Leaders of the Group of 20 richest and fast-growing countries agreed last month to step up efforts to complete the Doha round of trade talks by 2010. But many governments have been reluctant to reach a sweeping global agreement, which will open more markets including the agriculture area and is viewed as a threat to the already shrinking domestic job market.

IMF Managing Director Dominique Strauss-Kahn said Thursday it will be difficult to say the crisis is over until unemployment drops, which can come later than a resumption of economic growth.

He made the remarks when in Turkey's largest city Istanbul for the IMF and World Bank annual meetings to be held on Oct. 6-7.

"The recovery has really started," he said during a speech at the Bilgi University. "But that does not mean the crisis is over."


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