The deleveraging and other adjustments now underway in the aftermath of the global financial crisis are likely to exert a persistent drag on growth, making the present world business cycle different from the usual V-shaped one. This is the chief message in the August edition of the Export Finance and Insurance Corporation (EFIC) newsletter, World Risk Developments.
Latest data suggest that the world economy stabilised in the June quarter after slumping at a 7% annual rate in both the March and December quarters – the sharpest fall since the 1930s.
‘So the debate has moved on from whether the world economy is shrinking but at a slower rate’, says EFIC’s chief economist Roger Donnelly. Instead, discussion now centres on two questions. First, how rapid and sustained will cyclical recovery now be? And within that, will the bursting of an emerging Chinese asset bubble retard recovery? Second, will the long-run trend growth path after the crisis be as strong as the growth path during the long boom?
Opinion divides into two camps: those who say rapid and sustained recovery (‘V-shaped’) versus those who say slow and hesitant (‘U’ or ‘W-shaped’).
Donnelly worries that the slow-and-hesitant camp may prevail. He notes that the global recovery remains prone to three downside risks. First, premature withdrawal of policy stimulus before private demand becomes self-sustaining. Second, sluggish ‘global rebalancing’ – essentially shipping nations failing to shop enough to make up for shopping nations wanting to ship more. Third, a faultering of the current extraordinary Chinese lending boom.
The Chinese economy has bounced back strongly, supported by explosive growth in bank lending. This rapid lending is unlikely to have all been prudent. When lending inevitably slows, over-extended projects and enterprises, and ones adding surplus capacity, are likely to stumble, and the loans to then turn bad.
Chinese banks lent $US1.1 trillion in the first half of 2009, nearly double the sum lent in 2008 as a whole and equivalent to a quarter of China’s GDP. Donnelly notes that in comparison the Obama fiscal stimulus plan announced in February amounts to US$787 billion to be spread over 2009 and into 2010.
In other stories, the newsletter looks at the economic fallout from the Jakarta bomb blasts, a new IMF standby loan for the troubled Sri Lankan economy, and growing fiscal worries in the severely slumping Turkish economy.