WORLD ECONOMY TO LOSE MOMENTUM IN 2012

MOHAMMED ARIFEEN
(feedback@pgeconomist.com)

Feb 27 - Mar 4, 2012

Thank God, the world economy is less vulnerable to damage from higher oil prices than it was in the 1970s. Global output is less oil-intensive. Inflation is lower and wages are less likely to follow energy-induced price rises.

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 cut down to 3.3 percent from four percent. Lately, IMF forecast 2.5 percent for the world economy.

Chief economist of the IMF, Olivier Blauchard, warned that the world could plunge into another recession with the intensification of the European crisis. 27-nation eurozone would likely to fall into recession in 2012, with output contracting by 0.5 percent and global growth would come in about two percent points. Likewise, the US and other advanced economies would not escape unharmed if Europe's crisis escalates further.

The IMF maintained its 1.8 percent growth forecast for the US but downgraded its predictions for Japan to 1.7 percent from 2.3 percent in September 2011. Overall, economic activity in advanced economies is likely to expand by 1.5 percent on average in 2012 and 2013.

China's growth forecast was reduced from 9.0 percent to 8.2 percent in 2012. The imposition of sanctions on Iran's oil industry will have negative effect on the economic situation of the world in general and Japan in particular.

The IMF seems to have rightly ascribed the developing economic crisis largely due to the eurozone debt crisis, which is likely to force the continent into recession in 2012 and beyond.

The IMF has appealed to Europe to strengthen its rescue funds to set up a wall against financial contagion but the success of such an effort would depend largely on the relatively affluent countries like Germany and France and cannot be guaranteed in the current environment.

According to Reuters polls, the world economy will lose momentum in 2012 but it will keep moving in the right direction. Asian economies will gain the power of the expansion of the world economy this year, but with relatively subdued performances. Europe to experience modest growth and the United States, meanwhile, should see modest growth that will easily outpace its recession-hit European peers.

A Reuters poll that covers all of the top 20 developed and emerging economies, as well as some others in Asia, suggests global economic growth will slow to around 3.3 percent this year from an estimated 3.7 percent in 2011. It is more optimistic than the latest forecast from the World Bank, which forecasted world GDP would rise only 2.5 percent this year.

Biggest risk to the world economy at present is the eurozone's sovereign debt crisis, which has already hit export growth of China. An unexpected revival in US macro data has taken financial markets by surprise. China will again top the economic growth this year with growth of 8.4 percent, although that is only a little over the eight percent mark. Economists say it is necessary to create enough jobs to satisfy the country's fast-growing population.

India's economy will not be far behind, increasing seven percent in the 2012 fiscal year, although that would still be its worst showing in two years due to tight monetary policy and political stalemate.

Germany will probably be the only major economy in Europe to rise above sluggishness this year. Some economists expect its economy to expand by 0.5 percent in 2012. Even Japan got stuck up in deflation and struggling to overcome the economic shock of the earthquake and tsunami last March, will easily outstrip European economies with growth of around 1.8 percent in its financial year 2012-13. Australia's resource rich economy is likely to lead the developed world in terms of growth, with a solid 3.4 percent expansion this year.

In the context of Pakistan, a dwindling or sluggishness in economic activity in the global economy, particularly in the European Union, would definitely affect the level of exports and home remittances. Financial restraints in developed countries could also decrease the flow of official development assistance

It needs to be overemphasized 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.

These negative developments together with the IMF projection of continued high oil prices and substantial decline in other commodity prices would be harmful to Pakistan's balance of payments prospects.

In case the developed nations are unable to solve this crisis, it will finally affect Asian economies including Pakistan. If the world economy slows down, it will result in a decrease in oil prices, which would affect economic activity in the Middle East. Pakistan currently has millions of citizens working in the Middle East who send remittances back to Pakistan. Any disruption of activity in the Middle East will undercut those remittances and cause problems in the balance of payments.

If Pakistan does not increase its regional trade to make up for losses to Europe and the United States, it could face recession. If Saarc countries want to avoid recession, they need to remove tariff and non-tariff barriers and introduce free trade in South Asia.

Since Pakistan does not have any control on developments in other countries, we can only urge the government to be vigilant about the developing situation and continue adjusting their policies so as to lessening the negative impact originating from the international shocks on the economy of the country.

Japanese Prime Minister Yoshihiko Noda urged the eurozone to get to grip quickly with its debt crisis. He said that within the eurozone there should be major steps to alleviate the concerns of the international community and the markets. The prime minister warned that European nations would face a long struggle to regain market credibility.