Economists: Another Global Recession Looms

Thursday, 15 Dec 2011 07:50 AM

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Most economists now expect another global recession in 2012 because the world economic outlook is much darker today than it appeared in the early autumn.

In fact, from policymakers such as International Monetary Fund head Christine Lagarde to Goldman Sachs chief economist Jan Hatzius, a mood of skepticism and apprehension prevails, CNBC reports.

Lagarde warned in September that the world economy had entered a “dangerous phase,” and this month told journalists “the global economic outlook will be lower, and in certain parts much lower than what we had initially envisaged.”

Hatzius says growth in many developed economies is being suppressed by higher taxes and efforts to pay back household and corporate debt. “That combination is likely to see another two years of sub-par growth in the major advanced economies, extending into 2013,” he says.
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Lagarde’s concern is echoed by Pier Carlo Padoan, chief economist for the Organization for Economic Cooperation and Development. “We are concerned that policymakers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy,” he said.

lagarde200getty.jpg
Christine Lagarde
(Getty Images photo)
The Brookings Institution’s Eswar Prasad point out that things seemed very bleak in early 2009. “Here we are again,” says Prasad. “But what is different now is that the crisis of 2008 has created a huge debt burden, so constraints on policy are much tighter now.”

Despite all this gloom, most economists seem to expect the world economy to grow by a little more than 3 percent in 2012 — down only 1 percentage point from 4 percent in 2011.

A large majority of that expansion will come from emerging markets, which are not without problems of their own, says Paul Sheard, chief economist for Nomura, which said that China accounted for over 40 percent of global growth in 2011.

“No wonder we are so concerned about the risks of a hard landing in China,” says Sheard.

Economists also expect the U.S. will enter election year in low-key recovery mode. Unemployment has fallen slightly and recent growth rates have been somewhat higher than those in Europe, where the current crisis began.

Few economists expect the eurozone to recover quickly. In fact, most forecast contraction in the eurozone economy at the start of 2012 and near stagnation in countries, such as the U.K., surrounding the single currency area.

Of major concern is the possibility that a further economic downturn will greatly increase the stresses in the sovereign debt and bank funding market, creating a vicious downward spiral akin to 2008 and the potential collapse of the euro.

With the money supply contracting at the fastest rate since early 2009, Neville Hill, of Credit Suisse, observes, that “for institutions that set great store by monetary indicators — the European Central Bank and the Bundesbank, for example — that should be an alarming signal.”

The New York Times reports that the euro is hovering near its lowest levels of the year, as an Italian bond auction showed the bloom continuing to fade from Europe’s latest crisis summit meeting and an economic report added to growing evidence that a recession is looming.

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