World economy

Pessimism about the prospects of the world economy is growing. In its latest outlook for global growth, the International Monetary Fund (IMF) has warned that the eurozone debt crisis is escalating and dragging down the world economy. The forecast for global growth was chopped to 3.3 percent from 4.0 percent just three months ago, saying that the deterioration in outlook called for policies to restore confidence. It was also highlighted that the 17-nation eurozone would likely slip into recession in 2012, with output contracting by 0.5 percent and global growth would come in about 2 percent points below its already soft forecast if European leaders allowed the crisis to fester. Chief economist of the IMF, Olivier Blauchard warned that the world could plunge into another recession with the intensification of the European crisis. Also, the US and other advanced economies would not escape unharmed if Europe's crisis escalated further. As for the policy prescription, "the most immediate policy challenge was to restore confidence and put an end to the crisis in the eurozone by supporting growth while sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation." Elsewhere, the IMF maintained its 1.8 percent growth forecast for the US but cut its projection for Japan to 1.7 percent from 2.3 percent in September, 2011. Overall, economic activity in advanced economies was likely to expand by 1.5 percent on average in 2012 and 2013, too sluggish to make a major dent in high unemployment rates. Growth in emerging economies was projected to decelerate to 5.4 percent in 2012, down from 6.1 percent forecast made in September, 2011. China's growth forecast was reduced from 9.0 percent to 8.2 percent in 2012. The Fund's base line oil price projection was broadly unchanged at $100 a barrel while non-oil commodity prices were set to fall by 14.0 percent this year, with prices expected to go downside for most commodities. The downward revision in growth projections by the IMF during 2012, though largely expected, is definitely a cause of concern for all the countries of the world, and as such, the main factors giving rise to such a situation need to be thoroughly analysed and properly addressed as far as possible. The IMF seems to have rightly attributed the developing crisis largely due to the eurozone debt crisis, which is likely to push the continent into recession in 2012 and beyond. Unfortunately, Europe is now caught in a vicious cycle of high debt and low growth. Highly burdened by debt, most of the economies in the region cannot attain respectable levels of growth to improve their fiscal position and pay easily for debt servicing in order to unshackle their potential. To be competitive at the international level, productivity in European countries should have grown by about 3 to 4 percent during the 2000s but it has fallen by about 1 percent each year. Strong growth could make debt and other problems fade, yet the prospects for a strong rebound are feeble due to lack of reforms in many areas, poor working habits and unaffordable public spending as a result of generous pensions, increasing medical costs due to a large number of ageing population and the habit of high living standards. Problems have been further compounded by the compulsion to follow uniform and mutually agreed economic policies and the desire of certain countries in the European Union to follow their own agenda for domestic political considerations. There have been instances when the countries facing default have received financial assurances but backtracked on agreed reforms later on due to stiff domestic resistance. The IMF has called upon Europe to bolster its rescue funds to erect a wall against financial contagion but the success of such an effort would depend largely on the relatively prosperous countries like Germany and France and cannot be guaranteed in the current environment. Speaking objectively, the ideas of monetary union, common market and other forms of economic unions generally appear to be very attractive on paper but are mostly over-ambitious in practice, the reason being that it is nearly impossible to syncretise policies between a large number of countries when political sovereignty and the notion of independent economic policies is also jealously guarded. However, we can only hope that the crisis is over soon so that the world economy is able to regain its full potential. It needs to be hardly emphasised that Pakistan's economy is very closely linked to the rest of the world due to its high external sector exposure and several countries of the eurozone are important trading partners of Pakistan. As such, any untoward development in other countries could have a substantial negative impact on the economy of Pakistan. A contraction or stagnation in economic activity in the global economy, particularly in the EU, would definitely adversely affect the level of our exports and home remittances. Fiscal constraints in developed countries could also decrease the flow of official development assistance (ODA). These negative developments together with the IMF projection of continued high oil prices and substantial decline in other commodity prices would be harmful for our balance of payments prospects. Since Pakistan does not have any control on developments in other countries, we can only urge upon the authorities to be very watchful about the evolving situation and continue adjusting their policies so as to minimise the negative impact originating from the external shocks on the economy of the country. Copyright Business Recorder, 2012