labels: economy - general
Will world economy recover soon?news
Alok Agarwal
05 October 2001


Mumbai:
Is the US already in the midst of a recession? Some say it is. The recent issue of Fortune says: Forget any talk about whether there will be a recession. It is already here.

White House economic adviser Glenn Hubbard, too, reportedly conceded to the Congress that the economy is likely in recession. In any case, most agree that the US is almost certainly in the midst of a short-term recession.

Even Allan Greenspan, the optimist that he is, had admitted after the 11 September attacks that immediate damage to the economy is negative. Speaking to the Senate Banking Committee, he had reasoned that, post-attacks, much activity had ground to a halt largely due to the structural damage inflicted on financial systems.

He said: Payment systems among financial institutions had been disrupted directly by the attack on New Yorks financial district and manufacturers and distributors supply chains had been convulsed by the closure of US air transport system. The shock was most evident in consumer markets, where many potential purchasers stayed riveted to their TV sets and away from shopping malls. Credit card purchases were reportedly down 20 per cent in comparison to the same period last year and have yet to pick up.

Prior to the September 11 attacks, the American economy, in the midst of a slowdown, was beginning to show signs of an early revival. One area, which provided continued streams of optimism, was the housing market, which ducking the general trend, had surged ahead responding to lower borrowing costs.

In fact, analysts had predicted a 6-per cent rise in house prices pre-terrorist attacks, which have now been scaled down to moderate levels. Steve Brice, treasury economist with StanChart Bank Singapore, has reportedly said: House prices are the only thing holding up the consumer. If the housing market collapses, the economy goes with it.

Quite obviously, therefore, the main concern as of now is to avert a long-term recession, though Greenspan feels that the American economy is resilient and better equipped than before to absorb shocks such as the current ones.

A long-term recession in the US, considering the size of its economy estimated at $8 trillion, would mean a disaster for the world. In fact, the contagion is fast spreading to other sectors of the global economy such as the electronics investment cycle in countries like Singapore, Taiwan and Malaysia.

Efforts to revive the economy
Operation Salvage Economy is already on. Two things have happened in the last couple of days to suggest that. One, in a frantic move on 2 October, Allan Greenspan, for the ninth time in the present calendar, cut down the interest rate by 500 basis points bringing down the borrowing rate to 2.5 per cent, lowest since 1962 when John F Kennedy was the president. The Fed said it was prepared to bring down interest rate further, if needed.

Two, President George W Bush announced considering an economy stimulus package amounting to $100 billion aimed at reviving the economy. He reportedly said: Whats needed is a stimulus package big enough to get the economy moving in the short run, but small enough to not affect long-term interest rates.

The $100-billion package comprises roughly $50 billion in emergency spending and $45 billion in the form of new tax cuts. The idea is to arm consumers with more cash, which they would go out and spend.

Will it work?
The key question is will bringing down interest rates or implementing economic package suffice to put back life into a recessional economy? Look at Japan. The interest rates there have been zero for a long time now, but the economy refuses to respond. Low interest rates merely mean low borrowing costs, but it does not necessarily mean consumers, already burdened with record debt, will borrow more no matter how cheap the money is.

Losses in the form of fall in equity values, which has reportedly eroded wealth by almost $1.75 trillion, will prevent consumers from taking risks and borrowing more. The same holds good for the industry. The excess investment that took place prior to the year 2001 has left so much of excess capacity that industry is unlikely to make profit even if interest rates are zero.

Clearly, there is what is known as a crisis of confidence in the system. The need of the hour, therefore, is also to tackle crisis of confidence among the trade as well as the consumer, which is what is holding back investment and expenditure. The consumer may have a lot of cash to spend but will he go out and do it?

Fear psychosis of an impending slowdown will prevent them from parting away with cash, in the process holding away that precious expenditure. Therefore, the need to infuse confidence so that the American economy will revive and bounce back. After all, the US is not Japan.

 


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Will world economy recover soon?