Signs of an economic doomsday... is there a way out?

With the World Bank announcing that the world economy is teetering on “a new danger zone,” it is of paramount importance for governments and financial power-houses to restore confidence through concrete policies and systematic financial planning.

This is the order of the day, given the recent pessimistic report on the world economy delivered by Morgan Stanley, whose global growth forecast was lowered to a mere 3.9% for the year 2012. The IMF also lowered its global forecast recently to 4%. This is a 0.5% reduction from previous predictions.

After all, when the global growth rate flounders at under 2%, the world is officially in recession and economists the world over have acknowledged that economic growth, which had been strong in 2010, has indeed declined in 2011.

Digressive trend

The economic tracking of world economies clearly reflects a digressive trend. Economies such as Switzerland’s grew at its slowest pace since 2009 while the German economy grew a mere 0.1% during the quarter.

The Purchasing Managers Index (PMI), which is an indicator of the economic health of the manufacturing sector, contracted/fell in leading countries such as Ireland, Spain, Italy, UK, Germany, Japan, US, Greece, Switzerland, Sweden, Taiwan and China, setting the trend for quick-fix measures to boost economies in the face of the mounting fear of global recession.

The World Economic Outlook projected that real GDP in advanced economies will expand at an anaemic pace of 1.5% in 2011 and 2% in 2012, and these predictions are dependent on the de-escalation of volatility in global financial markets and consideration measures taken by the US and its European counterparts. Thus, the decline in Gross Domestic Production (GDP), massive losses in the exports sector, plummeting capital spending and frugal private consumption rates also contributed to the ringing of alarm bells.

It is clear that effective policy initiatives are much needed to boost the economy, but at the heart of the economic crisis, lies the crippling overpricing of primary inputs – the drivers of the economic framework such as labour, human capital, capital, land and sometimes natural resources such as oil, gas and energy.

A global economic meltdown will occur only with the skyrocketing of primary input prices in the financial market, since such inputs/factors act as stock providing services that contribute immensely to the production process.

In today’s dominant era of globalisation, this means that prices of market commodities are deeply interconnected. When the price of a particular input is inflated, it triggers a chain effect of market reverberations. A classic example would be that if oil prices increase fuel surcharges by airlines will rise. This would affect holiday patterns of middle class families and individuals who travel, which in turn negatively impacts tourism growth in most countries. It also curbs spending habits and consumption flows significantly.

Decline in global consumption

The current fragile state of the global economy is also indicative of the deepening decline in global consumption. Even OPEC (Organization for the Petroleum Exporting Countries) links the slow growth in the demand for world oil in 2012 to fluid factors of consumption. The equation has, after all, always been Demand = Supply.

Simplistically, it is evident therefore that economic growth is interconnected to human consumption. It is with this understanding that current policy trends have witnessed governments focusing on boosting national/domestic consumption centred on self-sustaining growth. The time for austerity measures are over.

Interestingly, World Bank President Robert Zoellick recently analysed that the world’s second largest economy, China, can “boost global economic growth by pressing ahead with reforms to promote domestic consumption” and “reduce reliance on exports and investment”. This does not signal the death of capitalism or the demise of free trade, but rather an awareness of the need for sustainable consumption rates as the way forward in stabilising a haemorrhaging global economy and interdependent world markets.

It may also, quite blatantly, herald the rise of mega-corporations to streamline and develop national economies, as a more robust substitute for failing governments. This adds greater emphasis on public sector – private sector collaborations and cooperation to build nations in the future, given the volatile economic climate we live in.

Economic growth

The realisation that economic growth is the order of the day has urged the IMF to consider urgently the “rebalancing acts” needed for top world economies for strong, balanced and sustainable growth. This again is tied to individual, household and organisational/corporate demand, not only domestically within a country but also foreign/global demand, which increases overall consumption rates, positively affecting manufacturing and supplies.

Unemployment plays a key role in declining world consumption and overall growth. The mounting fears that the USA might be headed back into recession after the Labour Department reported that the  economy added zero jobs in August 2011 - its worst employment report in 11 months – is indicative of the importance of maintaining sound employment rates around the world.

In fact, governments have lost general elections based on a country’s employment track record and it is no surprise that the leader of the world’s largest economy, Barack Obama, recently pledged to propose a “new way forward on jobs,” whilst unemployment rates remained high, at over 9%, in the US, inevitably denting domestic development.

Short term stimulus packages, higher taxation on essentials and the middle class, temporary deficit-cutting initiatives and reduced spending on infrastructural development does not provide the much needed panacea for the world economy. Even Obama’s tax war on millionaires (The Buffet Rule) will fail to do the trick.

New economic order

The urgent need for the hour is a new economic order with a stable currency; not artificial injections to increase liquidity within the economy, such as printing more money to increase the flow of money supply or the doling  out of subsidised services and products to key domestic sectors such as the agricultural sector to boost growth.

In many countries – developed and developing – huge amounts of domestic revenue are allocated to the war budget or for defence expenses, often resulting in a budget deficit. Sri Lanka spent $ 5.5 billion on its military campaign which defeated the LTTE from 2006-2009 – with a staggering Rs. 4,000 loss being incurred every second during the final phase of war in 2009 – while the US Government spent 700% more on long-winding wars in Iraq and Afghanistan.

Vital funds such as these should be ideally channelled as continuous investment in rebuilding domestic infrastructure, especially in the health, education and government services sectors. Only then will long-term economic stability be achieved in a practical manner through robust local economies that grow strong to trade globally.

Sustainable pricing

The need to maintain sustainable pricing for primary inputs is an urgent one. It is an urgency that should dominate international think-tank processes regarding the world economy. This need is also tied closely with the call for a new economic order that is not dependent on the fluctuations of the Dow Jones Index or the volatility of the US Dollar to curb ballooning budget deficits or chronic trade deficits.

Does this mean that we need a new money regime that departs from the world economic order born after World War II, which was fashioned by the US with the Principle of the Dollar Standard? ‘Empty currencies’ – whether in dollars or yet unborn multinational currencies – are a bane to any economic order if it boosts artificial money supply mechanisms that triggers mounting inflation.

However, it could signal a futuristic progression towards a single global currency in domestic and world trade, which could pave the way for greater buying power by not only the Western Capitalist States but by the Asian super-powers. Or as the World Bank predicts, ‘Emerging market-countries will becomes key players in financial markets.’

A new world order

A new world order with a more diffuse distribution of economic power is emerging gradually and only time will tell if it provides the much needed panacea for a limping world economy. Another alternative is to strengthen the dollar with other strong currencies like the euro or the Chinese yuan, leading to a system of interdependent multi-currencies.

Whatever the case maybe, it is clear that the only way out of the abyss of recession is to innovate and implement new processes and policies. Processes strong enough to withstand natural disasters, like earthquakes and tsunamis, nuclear crises, like Fukushima, and erroneous policies adopted by primarily partisan Governments... basically, what the world needs is a form of revolutionary economics; a 360 degree turnaround from what we already know about markets and trade.

(The writer is a Chartered Accountant who has been managing a loan portfolio in excess of US$ 2 billion abroad. He is the Managing Director/CEO of Chemanex Plc., Chairman of The Finance PLC and Director of many other public and private limited companies in Sri Lanka and abroad. He is also a member of the Monetary Policy Consultative Committee of the Central Bank of Sri Lanka.)