For airlines, it is a standard safety procedure to ask passengers to open their window shades for take-off and landing. We are asked to raise the window shade so that we can see through the window. Not for the pretty view, but to help remain oriented (which way is up, etc) if there?s an emergency. And so when we are about to land at the Mumbai International Airport we are forced to see huge clusters of slums and it?s obviously not a pretty view. If Maharashtra Tourism Development Corporation or Slum Rehabilitation Authority could change airline safety procedures, they would probably make it mandatory to keep the window shades closed during take-off and landing.
The World Bank recently released the Global Economic Prospects report and the global economic view from this recently released report isn?t pretty either. Hypothetically, if high-income countries could force the World Bank to provide a rosier view of their economy, they would probably do so because the data, in effect, indicts these governments on economic mismanagement. Looking at this recently released economic data can help us remain oriented in terms of which way the developed economies are headed. And indicators show that these governments need to fasten their seatbelts because it?s going to be a bumpy economic ride ahead.
The World Bank has halved the growth expectations in the high-income countries. The growth is expected to come in at a mere 1.4% in 2012, versus a June 2011 forecast of 2.7%. Even this reduced growth expectation of 1.4% seems optimistic when you look at the larger picture that the data paints on trade, industrial production and capital flows. I won?t be surprised if by the middle of this year the growth expectations are revised down further for these developed economies. The prospect of recession looms large in Europe and there is, at best, anaemic growth in the US. More likely, the US may be in recession too by the middle of this year as it contends with an on-going deleveraging in the household sector amid weak job creation, stagnant incomes and persistent downward pressure on real estate and financial wealth. This is compounded by significant fiscal drag, political gridlock and rising inequality. Among the other major economies, the UK is double dipping, as front-loaded fiscal consolidation undermines growth. In Japan, the economic damage due to tsunami and nuclear mishaps coupled with a weak government failing to implement structural reforms is likely to keep the economic outlook glum.
Trade volumes have declined at an annualised rate of 8%. Addressing current-account imbalances and weak competitiveness requires currency adjustments. But then, currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Developed economies? co-ordination for solving the economic problem is weak as witnessed in the recent threat by the UK to obstruct a Franco-German drive for change in the EU treaty. On a larger politico-economic canvas, the promise of the G-8 has given away to the reality of G-0: the views, goals and interests of these major economies are coming into conflict as they are internally inconsistent.
In the last six months, stock markets in these developed economies lost $6.5 trillion, or 9.5% of global GDP. During the same time, sovereign ratings have got downgraded along with that of large financial institutions. Government?s fiscal policy is consequently constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules. Backstopping and bailing out financial institutions is politically unpopular as was seen in the spontaneous ?occupy Wall Street? protests. Moreover, these near-insolvent governments don?t have the firepower to bail out financial institutions. As a result, dealing with skewed leverages like the massive debts of governments, financial institutions and households is a teething problem and needs unvarying attention. But these economies have chosen to paper over the cracks.
What?s more worrisome is that policymakers in these economies are running out of options. Monetary policy will be eased further, perhaps in the US by doing Quantitative Easing. But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency, and thus creditworthiness, rather than liquidity. Restoring growth is difficult enough without the ever-present spectre of deleveraging and a severe shortage of policy ammunition. But that is the challenge that these developed but unbalanced economies face. When they open the ?window-shades? for a clear outside economic view, the view isn?t pretty. The teething troubles are not going to disappear by themselves. The irony is that these governments have chosen to keep their window shutters closed. They can choose what they wish to see but it isn?t going to change the existence of the economic favela.
The author, formerly with JPMorgan Chase, is CEO, Quantum Phinance